Britain's Gravest Economic Challenge Isn't Brexit

Tyler Durden's picture

Authored by Paul Wallace, op-ed via Reuters.com,

Few British budgets have mattered as much as the one that Philip Hammond will deliver to the House of Commons on Nov. 22.

The chancellor of the exchequer must shore up Theresa May’s perilously shaky government ahead of a vital Brexit summit of European leaders in mid-December. At the same time Hammond has to keep a grip on the public finances.

But the gravest challenge he faces is economic: Britain’s persistent productivity blight.

Productivity – output per hour worked – is the mainspring of economic growth.

In the decade before the financial crisis of 2007-08 productivity was increasing in Britain by just over 2 percent a year, outpacing the average for the other economies of the G7. But since the crisis British performance has been dismal. Although productivity jumped in the third quarter of 2017, prolonged weakness means that it is barely higher than its pre-crisis peak a decade ago. The recovery in GDP has been driven overwhelmingly by more labor input, a source of growth that is running dry – not least since the vote to leave the European Union delivered a message to curb immigration.

Other advanced economies have also experienced setbacks to productivity growth following the financial crisis. Where Britain stands out is in the severity of its reverse. The shortfall in productivity is the main reason real wages are now 4 percent lower than 10 years ago, a potent reason why the leave campaign prevailed in the Brexit referendum.

Productivity is so central to prosperity and to macroeconomic management – by determining how fast the economy can sustainably grow – that a gaggle of economic researchers have been busy in their labs trying to diagnose the now decade-long disease. Early detective work highlighted the impact of the financial crisis itself, which was especially severe in Britain. This held back productivity by throttling bank credit to new potentially fast-growing ventures and by jamming up the usual way in which capital moves from declining to advancing sectors. 

But as the crisis has receded and British banks have become better capitalized this explanation is less convincing. Longer-term forces appear to be in play in Britain and elsewhere. Firms at the technological frontier continue to forge ahead in raising productivity. However, the diffusion of their best practices within economies has slowed. An aging workforce is now acting as a drag. And the contribution to productivity from improved educational attainment is falling.

One reason the productivity setback has been particularly severe in Britain is that its apparently robust performance before the crisis was overstated and unsustainable. Banking activities ballooned on the basis of what turned out to be economically and socially harmful practices such as risky securitizations. Despite making up less than a tenth of the economy, the financial sector has been responsible for nearly a third of the productivity slowdown. Longstanding weaknesses in qualifications and skills have also become more damaging as business becomes more knowledge-based. Over a quarter of British working-age adults perform poorly in numeracy or literacy or both.

Investment is inadequate, too. Although firms have stepped up their capital spending after it collapsed during the recession, they have done much less so than in previous recoveries. Business investment is only 5 percent above its pre-crisis high a decade ago. At a similar stage in the recoveries following recessions at the start of 1980s and of the 1990s it was 63 percent and 30 percent higher than the respective previous peaks.

The reluctance to invest in turn is rooted in a financial and business culture that is especially and perniciously short-termist in Britain. Firms under pressure from the markets are reluctant to make the strategic investments needed to keep productivity moving ahead. And too many British managers are simply not good enough.

Although a definitive diagnosis of the British productivity disease remains elusive there is a surprising degree of consensus about the treatment needed to resuscitate the patient. The chancellor’s to-do list should include steps to tackle congested roads and overcrowded trains, to support the sciences, to foster R&D in the private sector, and to upgrade Britain’s poor skills. Since competition spurs higher productivity as new and smarter firms drive out older and less productive businesses, Hammond needs Britain to be as open an economy as possible.

The remedies make good sense but they will not rescue the chancellor, who has in any case already announced more spending on infrastructure. First, they will take time to be effective. Second, finding more money for austerity-hit public services such as policing and health will add to the pressures on the public finances. And third, Brexit is now contributing to the productivity malaise as businesses respond to corrosive uncertainties by curbing their investment plans and as Britain becomes less open to trade by leaving the EU. Raising taxes is always an option for a cash-strapped chancellor, but it would be highly unpopular − not least in the bitterly divided Conservative party.

When he presents his budget, Hammond can be expected to put a brave face on things. He will point to the fall in the budget deficit from a peak of almost 10 percent of GDP after the financial crisis to 2.3 percent of GDP in the financial year ending in March 2017. But what matters now is the future path of the public finances. Britain’s poor productivity prospects will box the chancellor in because GDP is the tax base and future revenues will be smaller to the extent that output per hour worked continues to stall.   

The harsh reality is that Brexit will blight the public finances by hurting productivity. While Prime Minister May might see Britain’s overriding priority as ensuring that next month’s summit enables the Brexit talks to move on to trade, she’ll have to broaden her focus if she hopes to stay in office long enough to secure a deal that minimizes the damage Brexit is inflicting on the economy.

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Yen Cross's picture

THe Limeys need to tell Draghi to "FUCK right OFF". Europe is dead without London.

spag's picture

what productivity? spending all my time on zerohedge and watching my bitcoin price and cat videos, no time for actual work. just need a bunch of unpaid interns to leech off.

EddieLomax's picture

"The recovery in GDP has been driven overwhelmingly by more labor input, a source of growth that is running dry"

Here is the central error he makes in his analysis.  Having more workers does indeed increase GDP, but not GDP per capita, low skilled ones reduce that.

He also completely ignores the fact that the UK is a welfare state.  Therefore each person is both a liability and an asset, low skilled workers are more a liability than an asset because the taxes they contribute are far less than the healthcare and pension costs the state is liable for.

The simplistic approach to GDP and immigration is a root cause of the lower prosperity seen in the UK.

OverTheHedge's picture

"Over a quarter of British working-age adults perform poorly in numeracy or literacy or both."

That is because over a quarter of Brits are neither numerate not literate. They also see no reason to contribute to the economy, as they can receive benefits instead for not working. Quite a sensible choice.

Of course, you could increase productivity almost immediately, by remove the Health and Safety Executive, whose sole reason for existence is to stop people working.

Shropshire Lad's picture

A high proportion of the illiterates are foreign-born.  This has been greatly emphasised by the huge numbers of manual workers pouring into the UK from eastern regions of the EU.   

OverTheHedge's picture

Where I come from, we drinks cider, and talks like pirates: "I can't read nor right, but I can drive a tractrrr"

Most of the people I went to school with spoke English as a second language, and they were 500 generations British.

"Bodmin? Don't go there! 'Tis haunted!"

BuddyEffed's picture

Does productivity structurally depend on resource throughputs?

North Sea depletion underlying cause?

Offthebeach's picture

In a socialistic, politicalized economy, businesses that run on tight margins, never know when .gov is going to pull vote getting scbeme out of their ass and upon enterprises. 

So the majority of tight margin businesses never know when their buisness plan is going to have the rug pulled out from under.  So why invest in a costly undertaking?  

Besides, can't we all work for the town, county, state, fed, legions of authorities?  in at 9, out at 3, .....

Endgame Napoleon's picture

Western economies are set on OVERDRIVE. It is automation and the steadier, less fluctuating rate of productivity when computers do more of the work, as opposed to the surges and lulls of productivity when more work is done by humans.

It has to be.

The US removed the immigration restrictions enacted in the Twenties and, in the intervening 40 years of unfettered immigration, saw nothing but FALLING wages for men and stagnant wages for women, most of whom did not have far to fall. Female-dominated jobs, where the vast majority of women still work, have always had extremely low wages. They still do.

The fake-feminist movement has driven the average up a little there, not the [real wages] for most women in female-dominated industries. They just made sure that a few women are now in the upper eschelon of earners, and these women are almost always married to other high earners, concentrating wealth from salaried jobs through assortative mating.

We have tons of single mom citizens, working only 20 hours per week to comply with welfare reform rules and to stay within the less-than-$1,000-per-month income limit for welfare to ensure free housing, free groceries, monthly cash assistance and a child tax credit that, at the maximum for high womb productivity, equals 4 months of full-time wages in many low-wage jobs.

The immigrants do the same thing, getting unearned income from government via high womb productivity from a stay-at-home mom (in their case) and a sole, male breadwinner. If those welfare-boosted immigrant mommas [too] entered workplaces en mass, wages and hours would stagnate even more for women with earned-only income, as employers would have one more pool of women, willing to work for beans due to their unearned income for womb productivity.

The pile on of unearned income from government to reward [womb productivity] in increasing amounts per birth has made [work productivity] in the USA unrewarding for most who lack the pay-per-birth freebies or spousal income.

The natural pool of hard workers who need to work hard to finance all household bills on [earned-only] income are squeezed out by this rigged system. You cannot afford rent that absorbs half or more of your pay, no matter how hard you work or how many sales you generate, unless you have unearned income streams for womb productivity, taking care of your major household bills.

Furthermore, employers in female-dominated sectors seek out this welfare-bolstered labor—openly—showing preference for a workforce that can afford to work part time for low wages due to their unearned income from spouses, ex spouses or government.

Employers WANT low-productivity workers with unearned income—with “somethin’ comin’ in,” as one explained.

That is because machines are doing more of the work, meaning that employers do not even need full-time human workers as much, and yet, governments are rewarding citizens and immigrants for producing more humans to compete with robots for jobs.

It is not just low-skilled workers with low incomes; the highly paid working parents have never / ever been allowed so many lengthy babyvacations. These high-skilled, “busy-working” parents, lauded by the media, are “the talent,” but somehow, their talents are needed less and less at work. They can be spared from workplaces for long stretches of time, enabling them to put “family-friendly” concerns first.

The truth is that many of their tasks are automated or half-automated.

Theoretically, automation is supposed to increase productivity. So maybe, the humans are not yet in synch with the machines. But that is not what it seems like in the broad array of temp jobs, where they train mass numbers of temps in huge training classes in a week to cover fluctuating volume. They train them on multiple types of software in a week with an intent to churn, whereas in the past they had to train double, triple or quadruple the workers to do each aspect of the work done by those computer programs by hand. They invested time in training those workers and kept them on, full-time, because they needed them. Now, only 6% of new jobs created are full time.

In addition to tolerating a stunning amount of absenteeism from working moms and from a few working dads, employers emphasize participation in non-work activities to such a degree that the machines have to be doing most of the work.

[Work] days are full of baby-mommy-look-alike-bulletin-board-decorating contests, Halloween dress-up days. adult cubicle Easter egg hunts, spin-the-wheel contests with candy prizes, parking lot toss-the-beanbag games, potluck lunches with soft-porn movie (government job), movie days, bowling days, Family Day picnics etc., etc., etc. If you fail to participate avidly in these silly activities, you are regarded as not being an all-important “culture fit,” even when your account-generation numbers and account-retention numbers are among the highest in the building.

That is because, even in sales, much of the work is coming in through the internet, with managers just kind of controlling the flow. Any one individual’s sales mean little in this case, even when they come to work every day, stay the whole day and sell a ton, while most others take off from work a ton and generate almost no new accounts.

If the productivity decline is not tied to automation, it seems like workers whose skills cannot be duplicated by machines would still have [truly] busy work schedules, not whole mornings off, whole afternoons off, whole days off and whole weeks off, increasingly indulged in their excused absenteeism in the many mom-gang jobs, in addition to their PTO and multiple pregnancy leaves.

They, too, just like their mom-gang counterparts at lower wage levels are on a protracted, excused babyvacation every few months.

How could companies survive this if machines were not putting the economy into [overdrive], doing the bulk of the work but at a steadier pace that does not fluctuate as much. Maybe, when more work is automated, you see fewer increases in productivity because of machines, working at a more predictable, linear rate of production, whereas with flesh-and-blood humans you get growth spurts and slow downs.

DelusionsCrowded's picture

London is dead without Europe . Anyway the whole Brexist BS is nothing but a scam , to distract the sheeple and keep them out of important matters . 

BrownCoat's picture

"Brexist BS is nothing but a scam"

DISAGREE. I think Brexit was unexpected by the (delusional) elites.
Trump was also unexpected. Those pulling the strings always expect to get their way. When all the "sheeple" say otherwise, the elites call a "do over" like the EU Constitution /Lisbon Treaty. 

David Cameron was trying to get a negotiating advantage by calling the Brexit vote. The EU stiffed him anyway. The British people, however, were afforded the FIRST opportunity to vote on their sovereignty. They voted to remain a country (as opposed to a relatively powerless entity in the EU superstate). 

The "do overs" started almost immediately after the vote. The UK courts said the Parliment had to approve the vote. Legal machinations continue to this day with Parliment's Remain camp wanting to approve various facets of the Brexit deal. So far, the elite's "do over" strategy is working! It has been over a year since the Brexit vote and yet the UK remains.

JDFX's picture

Automation is the solution to increased productivity. Indeed it may explain why the Bank of England are planning for a 50% cull in human workers this coming generation. Same fate for the USA. 

 

All those driving jobs, will be gone, like tears in rain. Time to replace...  

 

Sandmann's picture

What are you going to automate ?

iPhone production is automated.......in China

Car production is automated .......everywhere

 

http://www.clements.com/sites/default/files/resources/The-Most-Litigious...

So even the US isn't the most litigious country. What do you want to automate ?

quadraspleen's picture

“What do you want to automate”

Central bankers?

Creative_Destruct's picture

A productivity blight in a disincentivized on-the-dole socialized economy? Whoda thunk it!

 

Sandmann's picture

Britain's problem is having second biggest trade deficit on earth after USA.

It had N Sea Oil and behaved like Saudi Arabia - don't make - import.

It replaced N Sea Oil with easy credit.

It has low productivity because it has low value-added sectors apart from Aerospace. It does not invest in machines because its tax system favours dividends over tax credits and taxes cashflow.

It uses cheap labour on short-term contracts and you cannot do that with skilled labour

Twee Surgeon's picture

No, you are wrong. Britain has a silent and semi secret Communist government working for and paid for by international banks.

North sea oil or Olive oil. it makes no difference. The Will of the British people is completely ignored and this untastey truth is also now true in the good old USA where shit is going down hill at the speed of WTF ! at this very moment because the will of the people is completely irrelevant theatrics at rigged voting booths, rigged media and academic horse shittery up to the University level where even Archeologists must get with the program or fuck off to manage a Mc Donalds in Pacoima.

IT has low productivity measurement does not take into account the deliberately imported Dead Weight of Skill Free, 3rd world Heathens sucking off the idiotic natural compassion of God's own people who are, by ancient prophesy, going to prevail. I'm thrilled that a person who has attained your level of Ignorance has not a fucking clue what I am talking about. North Sea Oil, Find yer soul,if you have one, robot. time is short.

It? Dude, you are the It. The product of....It.

Cloud9.5's picture

I don’t see how you can dismiss North Sea Oil and its importance with a slight of hand.  Alaskan oil and North Sea Oil gave us an Indian summer in oil production.  That Indian summer coincides with the Reagan and Thatcher era that so many of us look back on with fondness.

 

We here in the States are enjoying a second Indian summer because of shale oil.  When the Indian summer fades, winter follows.

Ivan de beers's picture

ZeroHedge is starting to sound like alex jones' infowars conspiracy theory over-hyped financial reporting arm. Week in and week out ZeroHedge is reporting doom in markets from America to Australia but the opposite is true, millions are growing richer while zerohedge readers take cover afraid of the 'gay frogs'. Give it a break guys. Dont turn this good website into a youtube channel views-for-money thing by selling doom porn.

Iggby's picture

I suggest you reread the slogan for this website. "On a long enough timeline, the survival rate for everyone drops to zero"

The Zero Hedge modus operandi is to report the other side of the market, even if the market is "booming" or "improving." Many people read the articles here to get a different perspective on what is going on in the markets and politics around the world. 

But if you want more positivity, there are plenty of mainstream outlets that will satisfy your desire for merrier news. 

Singelguy's picture

Correction, thousands are growing richer while millions are becoming poorer. The 1% have access to cheap money while the average Joe is getting screwed. Unfortunately, it is not doom porn. The writing is on the wall. The problem is no one knows how long this extend and pretend game can be sustained but you can be assured that the central banks will keep it going as long as they can.

Twee Surgeon's picture

Ssssssh! nobody say the Immigration word because dat's rayciss. How big is the UK ? http://www.travelersdigest.com/7348-how-big-is-the-united-kingdom-in-com...

Look at your future my American brothers and sisters and see your future, fore warned is fore armed.....https://www.youtube.com/watch?v=9HU-8AW3JW0

Cloud9.5's picture

We have visited the City on numerous occasions over the last forty years.  The first time we visited, we stayed in a little hotel on Baker’s Street. I have been an Anglophile for half a century.  My first new car was an MGB.  A Bren Gun sits on top of my book case in my study and there are at least a dozen Lee Enfields  in my gun safes.  Your Magna Carta set the tone of our social contract and your John Locke defined our natural rights.  The heart of the Anglo Saxon still beats.  This is not the first time you have been invaded. Do not lose heart; the City skews your numbers.

The City of London is an anomaly in the course of human events.  It is an international city that sits within your borders much like the Vatican sits in the heart of Rome.  As you well know, it is one of now several hearts of world finance.  The City is the product of a convergence of two very powerful forces.  It came about as a direct result of the size and scope of your empire.  Its level of complexity and integration was made possible by the dense energy sources found in coal and oil.   Just as your indigenous coal resources began to decline, your empire gave you access to a vast world of resources to include Middle Eastern oil.

The empire is now a memory and the sun is setting on the House of Saud.   The two converging forces that gave rise to the City are in decline.  At some point, Reverend Malthus will once again become the topic of conversation. Devolution will inevitably cause the City to depopulate.  That process will change your demographics. 

You have a wall to the north.  You might want to give some thought to reconstructing it as the forces of devolution run their course in the south.  Dig out the old maps and note where the mott and baileys were built.  Pay attention to the architecture.  Those types of structures are still relevant when it comes to dealing with mobs.  

You might want to become a bit nostalgic and collect the kit of your typical soldier from WW I or II. A hand full of determined fellows with such a kit could make your street much safer.  Good luck.

A final note, the 303 British was a black powder cartridge before it was a smokeless powder cartridge.  Black powder is made from sulfur, potassium nitrate and charcoal.  The formula is found in your Encyclopedia Britannica.  Lead is as close as your local scrap yard.

 

 

 

css1971's picture

Britain has been importing 300,000 workers a year for 20 years. Of course productivity sucks.

Why invest in capital goods to improve productivity when labour costs have been suppressed for decades, are cheap and bankers would rather flip houses because of population pressure.

It went from nothing to 1 in 7 of the population being non native over 20 years. The results of this policy are everywhere. Productivity will improve as people leave...

Jeez the problems economists have with the reality of cause and effect.

Easyp's picture

http://www.nationaldebtclock.co.uk/

Really?  Productivity not national debt the big worry?

JohnGaltUk's picture

THEY WILL DEFAULT. 100%, the UK will not be the only nation either.

OverTheHedge's picture

THEY WILL PRINT 100%. They always have, they always will. Not sure that they will ever need to default, although it comes to the same thing in the end.

quadraspleen's picture

Brit Bob will be along soon to tell us the UK's biggest problem is the Falkland Island sovereignty issue. 

Vigilante's picture

Limeys always bark up the wrong tree.

 

JohnGaltUk's picture

Leave BRITBOB alone you online bullies. I will have to start to love your hate.

DaNuts's picture

The cash economy is booming in the UK.

My Polish plumber has loads and he is taking it all back to Poland,

tax free.

webmatex's picture

My grandfather worked as a postal worker all his life with a break for Dunkirk, the war and injuries.

He died around 2000 at 86, over 20 years after my granmother passed.

They were the original folk, don't use the "never never" (credit), save, pay cash, government are all the same - crooks etc.

These clichés were very popular along with their unease of the Kennedy asassinations and their total rejection (with others at the time) that the moon landing wasn't real (and it was a pretty amateur production).

When he died he left a house worth over £200 000 and over £80 000 in cash, dozens of post office accounts and savings accounts.

They saved and bought their first house with cash in the 60's. He owned his own house for over 50 years and lived on two pensions for over 20.

This is what has been lost.

Today some guy with 4 wives and 30 kids steps off the boat and receives 4 seperate houses and welfare in excess of £200 000 per annum whilst the homeless numbers swell above 300 000 and 80% cannot afford to rent or buy.

It was a mess when i left over 35 years ago but the problems today appear to be insoluble and terminal and all too familiar in other EU countries.

The system is broken and can never be repaired.

They could sell Gibralter to the US and IPO the Falklands to raise some cash or the queen could do an MDB and grab all the dough in the offshore banks - desperate times and all.

JohnGaltUk's picture

They will NEVER reform, they will keep this booze bus going until it runs off a cliff.

Bloody Fkn Muppet's picture

But wait! We were told all the new incomers are happy clappy, hardworking, entrepreneurs! Just because the racist bigots said they were lazy, benefit sucking parasites doesn't matter! Libs know best!

Vigilante's picture

They can export muslims if they run out of money

The only 'product' that Blighty has in abundance.

webmatex's picture

Our Polish plumber and his two sons on the other hand are really something to behold - better, cheaper, faster, really nice guys, mama cooks them a lunch every day.

The chinese opened a resto/buffet with seating for 200 few years ago, they bought a house in our road and must be millionaires by now - family of 6 or 7 - nice people, we always say hello.

The entrepeneurs selling sunglasses and lighters and carving little wooden flutes from sugar cane not so much.

 

Dr. Bonzo's picture

Everybody loves the Pollacks. Poland suffered the historical indignity of being sandwiched between Germany to the West and the Russian Empire to the East. Poland has been a historical battleground since the beginnning of recorded history. And they've been a historical football ever since. And still... Poland is no fucking Somalia. So what's the African excuse again?

Exactly.

One of these is not like the others..'s picture

I've worked with two polish people now, and found them unpleasant and untrustworthy.

I guess, YMMV...

oncemore's picture

Moslems have boosted the UK productivity, for sure.

oncemore's picture

Moslems have boosted the UK productivity, for sure.

JohnGaltUk's picture

Police activity is up and it is hard to wake them up. They normally only work for the TV licence crowd to act as bully boys to scare the average citizen and to evict folks from their homes for the banksters.

wonger's picture

I thought that we will have another election, labour will win and hold another referendom result being remain, the pound will rocket back to 1.65 and everything will be fine and dandy unless the global bubble bursts and your left holding the bags and they dont have gold or silver in them!

PrivetHedge's picture

Even more people would vote for Brexit now, the EU is making it obvious they regard the UK as enemies. 

Even solid EUphiles are now saying 'fuck'em'.

Dr. Bonzo's picture

The establishment is fighting tooth and nail to reverse the popular mandate. Lie, steal, cheat. We've seen it all before.

Stay the course England.

CRM114's picture

The UK has 4 problems killing productivity:

1. Shit management. Unless you actually work there, you would not believe the amount of nasty, ignorant, arrogant BS that passes for management these days. Furthermore, said b@stards are protecting themselves by ensuring nobody who is really good gets promoted / hired.

2. Immigration. There are some marvelous Polish plumbers out there. There are far more useless, lazy, corrupt incompetents. The latter are the residents.

3. Government regulations; new start-ups are incredibly difficult to get started legally. And you need a 'fixer' just to get the utilities to turn up.

4. The talent, largely, isn't working mainstream. In response to the above three points, the good have either emigrated, retired, or are working off the books.

 

The Government knows all this, but pretends it doesn't; e.g. point 4:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...

 

css1971's picture

"accredited incompetents"

 

CRM114's picture

Indeed.

But we know what those credentials are worth, don't we?

max-kisser's picture

5. Buy to let landlords, who contribute nothing to GDP!!