Short-term, the outlook is dire - with the entire economy in turmoil productivity is likely to fall off a cliff. Workers in hospitality, travel and a host of other sectors are now on indefinite leave and surviving on three-month retainers, all issued by a government that seems willing enough to pile debt upon debt for future generations to pay off at their austerity-constricted leisure.
But there is a brighter side too. The way Britain works is being shaken up in a way so radical it would be inconceivable without a crisis like the coronavirus to set it in motion. Entire businesses are being reinvented in the virtual space, new processes are being set up, and those who were able to pass time visibly but ineffectually behind physical desks are finding it harder to justify their existences in a virtual world, where output rather than time served really is the only measure.
Quantifying this effect will be the work of the economists of the future, but given Britain’s terrible track record in productivity in recent decades, it seems that we have now arrived at what’s commonly known as a once-in-a-lifetime opportunity.
Back in the 1960s, productivity in Britain reached its post war peak, and it’s perhaps no coincidence that the political catch-phrase of the day, from populist Conservative Harold MacMillan, said “you’ve never had it so good.”
No one realised that the corollary to that vote-winning slogan was “and you never will again.”
From 1970 to 2007 average productivity growth slipped to 2.4%, consistently lower than most advanced economies, before it dropped off a cliff in the aftermath of the global financial crisis to bottom out and flatline at 0.2%.
No-one has been able to pinpoint the reasons for this consistent underperformance, although it was a truism at the end of the last century to talk about the effects of rebuilding after World War Two. Britain, so the economists’ pub talk had it, as one of the victors, had been able to patch itself up as best it could and carry on. Whereas the losers, Germany and Japan, had been so totally destroyed that they had had to start completely from scratch, and hence had rebuilt far more efficiently. Other countries in Western Europe had been similarly devastated, while America had been spared almost completely.
It was a world view that made sense, but in this age of coronavirus and Chinese economic resurgence setting events in the context of World War Two no longer makes sense. In short, the world has moved on, and so have the arguments.
In a report published in January 2020 by McKinsey, three factors were particularly highlighted as being behind the UK’s productivity lag. The first was that the boom and bust of the 2008 financial crisis had hit Britain disproportionately hard compared to other advanced nations, because of the country’s disproportionately large financial services sector. Financial services across the globe were hard hit, but the effects were felt more severely in Britain.
Not much that can be done about that, but the second and third factors that McKinsey identified are more susceptible of change. According to the McKinsey analysis, digitisation across the UK is patchy at best, and this needs to be fixed for productivity to improve. Indeed, the consultant draw a straight line between the two factors.
More significant still though, is the nature of the British working day. In the years following the financial crisis, says McKinsey, British companies hired labour “nearly as fast as output grew.”
In one sense that seems natural. But McKinsey sets it in a different context, arguing that investment in output came at the expense of investment in capital or improvements in efficiency.
“This focus on employment over investment acted as a broad-based drag on productivity growth. Why did UK firms add hours at such a high rate while demand growth recovered only moderately? We believe explaining this ‘employment puzzle’ is key to understanding the UK productivity-growth slowdown.”
Whether or not McKinsey’s puzzle ends up getting solved has now become somewhat moot in the midst of the coronavirus chaos. But afterwards, the country will be in a much better position to address it, both from the standpoint of the labour force, and from the standpoint of digitization.
This in turn, could benefit companies like Blue Prism Group PLC (LON:PRSM). The company said in an update on coronavirus put out at the end of March, that although there was plenty of uncertainty still around, there were also opportunities.
“Business disruption provides strong arguments for the strategic use of a Digital Workforce that can be deployed, accessed and monitored remotely to automate tasks and full business processes,” the
Of course, it helps that Blue Prism itself has a £42mln cash pile and looks like it can make it through the current crisis relatively unscathed. For those businesses that go under that will be scant comfort. But for those that do survive, the likelihood is that they will emerge leaner and meaner.