UK’s biggest companies are productivity slackers

Let’s stop talking about Britain’s productivity puzzle. It has been solved. An explosion of new evidence shows that the blame lies with the biggest and the best companies, which are simply not achieving as much as they used to. Yet the top of business and politics seems desperate to ignore the facts.

To recap, before the 2008-09 economic crisis, Britain’s output per hour worked grew steadily at an annual pace of 2.2 per cent a year. In the decade since 2007, that rate has dropped to 0.2 per cent. If the previous trends had continued, the national income would be 20 per cent higher than it is today. It is an enormous problem and the decline dwarfs that in other countries.

Theories explaining the puzzle have come and gone. It was reasonable to believe companies were hanging on to employees during the financial crisis — lowering productivity as output dropped — until they went on a hiring spree as growth came back. There is some evidence that real output is underestimated in sectors such as telecoms but, since people have found their living standards miserable, the problem cannot be dismissed easily as statistical noise.

And with banks having been at times both stingy and generous with credit without any significant effect on investment, financial constraints are not obviously to blame.

The answer instead lies at the door of what were previously Britain’s best companies and the most dynamic sectors. This hypothesis was first reported in the Financial Times three years ago, and now the evidence that the mighty have fallen is overwhelming.

A detailed sectoral analysis by the Economic Statistics Centre of Excellence this month showed just how concentrated the problem has been. Three-fifths of the drop in productivity growth stems from sectors representing only a fifth of output, including finance, utilities, pharmaceuticals, computing and professional services. These sectors have invested less than in the past.

At the Bank of England, staff have been taking a similar analysis down to the level of individual companies and found that it is the top ones that have become the slackers.

The most productive groups are “failing to improve on each other at the same rate as their predecessors did”, according to its research. Britain’s oft-maligned “long tail” of ordinary companies are exonerated. The best companies still improved their productivity faster than the rest, but the gap between the two has been dramatically reduced and this has hurt the UK’s growth rate.

Looking at individual companies on a regional basis, the Centre for Cities this week showed that it is again the most successful companies, normally those with highly skilled employees and exposed to international competition through exports, that drive success across the UK. Even though the leaders are not racing away as fast as they were, the cities that have done relatively well over the past decade — London, Cambridge, Bristol and Brighton — have a higher than average proportion of such companies. Britain’s productivity crisis is rooted in a lack of fizz in our best sectors and companies. It is therefore surprising that Andy Haldane, the BoE chief economist, has emphasised “measures which support the long tail of companies” as the most promising policy area.

It is odder that Philip Hammond, chancellor, chose not to berate the UK’s largest companies at the CBI dinner this week and instead flattered them by asking to help the country understand “why some businesses aren’t keeping up and don’t learn from the best”. Perhaps that is because, had he blamed the best, they would respond tartly, suggesting investment is difficult when the government is obsessed by a hard Brexit.

Although we know the cause of Britain’s productivity woes, we are sadly no nearer a solution. But starting from the right place is essential. Cures rarely arise from a misdiagnosis.