In the first quarter of 2018, the UK economy slowed almost to a standstill. It grew by just 0.1% in real terms. This was the lowest growth rate for over five years since a 0.1% contraction in Q4 2012. Household spending rose the least in over three years and business investment shrank the most in nearly three years.
The government and the Bank of England have tried to pass this slowdown off as due to bad weather in early 2018. But while acknowledging that bad weather had hit construction and parts of the retail sector, the official statistical agency, ONS, said “its overall impact was limited” and there was also an underlying slowdown in the growth of consumer spending.
The UK economy is now growing the slowest of the top G7 capitalist economies, as productivity has slowed to under 1% a year. Indeed, before the 2008-09 economic crisis, Britain’s output per hour worked grew steadily at an annual pace of 2.2% a year. In the decade since 2007, that rate has dropped to 0.2%. If the previous trends had continued, the UK’s national income would be 20% higher than it is today.
The ONS points out that the UK has the largest “productivity puzzle” – the difference between post-downturn productivity performance and the pre-downturn trend in the G7; this was 15.6% in 2016, around double the average of 8.7% across the rest of the G7. Indeed, only Italy has experienced a worse productivity performance since 2007 than the UK among the top G7 economies.
What this shows is that the UK capitalist economy is not suffering from bad weather or even the just the ”uncertainty” caused by Brexit, but instead there are deep underlying structural problems. I have dealt with the reasons for these before. British capitalism has become a ‘rentier” economy, where surplus value increasingly comes from extracting ‘rents’ and financial profits from productive sectors in other parts of the world.
Now there have been some further new studies on the reasons for British capitalism’s poor productivity record. It seems that poor productivity growth stems not from small local businesses that sell products and services within a small area, but failure lies with the heart of British capital’s big multi-national exporting companies.
A detailed sectoral analysis by the Economic Statistics Centre of Excellence this month that 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. The Bank of England did 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. The best companies still improved their productivity faster than the rest, but productivity growth among the best has sharply fallen and this has hurt the UK’s growth rate.
The graph below shows that the top companies have still improved their productivity more than the small companies but at a slower pace than before the Great Recession and so overall productivity growth has slowed and fallen even further behind other capitalist economies.
Looking at individual companies on a regional basis, a study by the Centre for Cities 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. “This idea that if only we can make the bottom 20 per cent of businesses more productive . . . is a bit of a red herring,” said Paul Swinney, head of policy and research at the Centre for Cities. “The fundamental problem is that we’ve got a low productivity economy outside the South-East.”
Why is productivity growth so poor in Britain, especially among the key big British multi-nationals? The answer is clear: reduced business investment. The latest business investment figure for Q1 2018 showed an absolute fall in investment. Business investment growth has been on a steady trend down since the end of the Great Recession.
Indeed, total UK investment to GDP has been lower than most comparable capitalist economies and has been declining for the last 30 years.
While most mainstream economic studies accept that the reason for the UK’s poor productivity record, particularly since the end of the Great Recession, is due to low investment in key productive sectors by key large companies, nobody has an explanation for this.
In my view, it is also clear why. The profitability in the productive sectors of the British economy remains low relative to before the Great Recession and even back to the 1990s. Profitability reached a peak in 1997. Since then, overall profits have risen in nominal terms by about 60%. But despite the credit boom of the early 2000s and the recovery since the Great Recession, profitability (ie profits per the stock of capital invested) remains below that peak. As a result, British capital has invested in financial assets or hoarded cash in tax havens or invested abroad rather than in the UK.
British capitalism has increasingly become a ‘rentier’ economy that aims to make money from money (finance capital) rather than from investing in new technology to boost the productivity of productive labour. This trend accelerated under the neo-liberal policies of Thatcher and successive governments and under global competitive pressure on old industrial and manufacturing sectors. While German capitalism maintained its manufacturing sectors through new technology, investment and exports (and relocation to the east), British capitalism opted for finance and related services over production.
The final straw was the global financial crash and the Great Recession – that led to a severe blow to the financial sector. Profitability in the non-financial sectors remains below the level before the global financial crash and well below the level of the last 1990s. While that continues, business investment will fail to recover sufficiently to raise productivity growth back to levels seen prior to the global financial crash.