The United Kingdom: Stronger growth needs significant productivity improvements across regions

By Daniela Glocker, OECD Economics Department

On the heels of the COVID-19 pandemic, the UK economy is again facing major challenges. A combination of substantially higher energy prices, increasing global prices of tradable goods and services and heightened uncertainty is dampening the economic outlook. The September Interim Outlook foresees annual growth for the United Kingdom of 3.4% in 2022 before stagnating in 2023. Inflation is expected to peak at just over 10% towards the end of 2022, driven by supply shortages and high global energy prices. Private consumption, a main driver of the recovery in 2021, is expected to slow as rising costs of living erode households’ income.

In this complex context, the Economic Survey of the United Kingdom 2022 argues that productivity must be strengthened to support growth and increase the country’s fiscal space. Already before the pandemic, productivity growth was lower than in many other advanced economies and has almost stagnated since the Global Financial Crisis (Figure 1). Productivity growth has stalled on the back of skill mismatches, low innovation and knowledge diffusion, as well as low investment. Regional disparities in productivity, income, work, education and health are high across UK regions and are weighing on aggregate productivity.

Raising productivity and living standards in lagging regions is at the heart of the government’s “Levelling Up” agenda and will require significant investment. The government plans for large scale investments in infrastructure, skills and innovations through its “Plan for Growth”. Public investment has increased in recent years and will remain close to a significant 2.5% of GDP over the coming years, however, large investments will be needed to compensate for years of underinvestment and to address long-term challenges such as the net zero transition. The Survey therefore recommends the government to continue its ambitious public investment as planned, and implement the Levelling Up White Paper proposals such as infrastructure investments and targeted spending in poorer areas outside London and the South East. The government should ensure funding is well targeted, better streamlined, and with a special focus on improving productivity in lagging regions.

A substantial rise in business investment, including in physical capital, innovation or new processes that would make labour more productive, is needed. Business investment has been slow on the back of Brexit and pandemic related uncertainty, contributing to low productivity growth. A policy environment that reduces uncertainty and provides a transparent and credible longer-term strategy could support business confidence and investment.

Figure 1. Productivity growth has almost stagnated

Average annual productivity growth rates, in percent

Raising skills across the population is the key to support productivity growth. On-going efforts to up-skill and re-skill are already significant, but digitalisation, automation and the transition to net zero will add to quickly rising demand for skills in an already tight labour market. The Survey welcomes the government’s focus on lifelong learning programmes, but stresses that it should be ensured that training opportunities for adults are of high quality and respond to identified skills need. It is equally important to make use of already existing skills. Women in the United Kingdom are highly educated, but many women reduce their working hours after they have children to take over care work. Reducing the high cost for good quality childcare, in particular for under 2-year-olds, could incentivise more women to work full-time and would be one way to grow the economy and reduce the gender gap in earnings.

As the United Kingdom readies itself to tackle the challenges ahead, it is not the time to repeat the old ways. It is the time to set the foundation for a new future. A future that is better and that is more productive.

Reference

OECD (2022), OECD Economic Surveys: United Kingdom 2022, OECD Publishing, Paris, https://doi.org/10.1787/7c0f1268-en.