Government must urgently solve productivity puzzle

Britain’s manufacturers are calling for the Industrial Strategy Council to be immediately created and given the urgent task of setting clear goals that will focus on solutions to boost manufacturing productivity growth.

The call from EEF, the manufacturers’ organisation, comes on the back of new research showing the evolution of manufacturing sub-sector productivity growth against key international competitors before and after the financial crisis, including where the problems and opportunities for growth now sit.

Key manufacturing sector findings:

• UK manufacturing productivity grew by 4.7% a year between 2000 and 2007, since 2008 this has flat lined at less than 1% a year
• Prior to the 2008 financial crisis all sectors of manufacturing contributed to productivity growth, however since then there has been significant divergence across sectors
• Since 1995 transport equipment and chemicals growth outperformed internationally and this trend continued after the financial crisis
• Pharmaceuticals growth ran in line with international growth but went sharply into reverse after 2008
• Food and drink, generally regarded as a weak performer in the UK, has outperformed internationally and held its lead over the past decade

The research shows that manufacturing is the engine to drive productivity growth across the whole economy having beaten whole economy and services productivity growth in the past. In addition, in the run up to the financial crisis the sector beat the manufacturing productivity growth of Italy, Spain and Germany.

However, looking under the bonnet shows that the performance of manufacturing sub-sectors has diverged since the financial crisis with productivity growth across the sector flat-lining. A focused policy response is now urgently needed from Government.

Commenting, Ms Lee Hopley, Chief Economist at EEF, said: “We’ve known about the productivity problem for some time with various attempts made to try and fix it across the whole economy. Productivity growth matters for wages and international competitiveness yet ten years on from the start of the financial crisis these attempts have not delivered a major shift and we need to tackle the challenge in a different way.

“Manufacturing offers a good area to get gains on productivity growth. The Industrial Strategy Council should now be created urgently and put to task to identify how the overall strategy can improve productivity in those industrial sectors where it has lagged.”

According to the report, Unpacking the Puzzle, there is not one factor that can completely explain the productivity performance of all manufacturing sub-sectors so a targeted solution is needed. EEF’s initial assessment of what is needed has identified the following:

• Size matters, with larger companies being able to exploit economies of scale, vertical integration opportunities and with it, higher levels of productivity. Our analysis shows sectors with a higher share of larger firms tend to outperform internationally.
• Boosting capital investment is not a silver bullet solution, for some sectors significantly investing more may not bear fruit. As an example, despite Italy having higher levels of investment in capital equipment compared to Germany, productivity levels in Italy are weaker.
• More UK manufacturing sectors undertake ancillary services as part of business operations compared to international counterparts. This suggests UK manufacturers are more likely to be at the end of value chains where the opportunities for productivity growth may be lower, but profits higher.
• Lastly, management practices across UK manufacturing do not reflect international best practice with a long-tail of companies with poor management practices. Evidence suggests companies with better management capabilities are more likely to have higher rates of productivity growth.

Alongside the Industrial Strategy Council finally being set up, EEF is calling for four specific additional measures as part of the industrial strategy to be delivered before the Parliamentary summer recess.

1. In response to growing frustration, provide clarity on the purpose of sector deals and better project management of those in train. This should include kick starting the promised Made Smarter Commission.
2. Effective Local Industrial Strategies require the foundation of formal governance arrangements. We need a devolution framework setting out what is on offer, and what governance is needed to unlock it.
3. The White Paper committed to a new strategy for export promotion and business responded to the call for evidence. Details of this new strategy should be published ahead of recess.
4. The Spring statement announced an upcoming call for evidence on the UK’s long tail of less productive firms. Industry wants to see a post-purdah push on where government action is needed.

EEF intends to use the research as a starting point for in-depth analysis of manufacturing sector productivity over the summer before producing an extensive report in the autumn. This will contain policy recommendations for the Autumn Budget.