Ireland, Spain lead Eurozone charge for productivity growth

Eurozone real GDP per hour worked - a measure of labour productivity - grew at a rate of around 2% in the three years to 2015. And a closer look at the data shows that Ireland has been the top performer in the period, with its labour productivity growing by around 7% over the period.

Large economies like the Netherlands, France and Germany have become more productive in line with the bloc average, while peripheral economies like Portugal and Greece have not managed to significantly increase their labour productivity levels despite carrying out reforms over the period.

But sectoral fortunes have been mixed. PwC analysis shows that in several Eurozone economies, productivity in the manufacturing sector has grown at a relatively rapid rate.

“This makes sense, as most manufactured goods are tradeable and so exposed to competitive forces, all of which incentivise businesses to become more efficient in a shorter period of time. Also, new automated technologies tend to be most readily applicable in the manufacturing sector - though they can also apply to more routine services activities,” said Richard Boxshall, Senior Economist, PwC.

“There are, however, some outliers –such as Ireland, for example, where the doubledigit productivity growth rate in its manufacturing sector could be explained by its highly efficient pharmaceutical industry, which accounts for around a quarter of goods exports.”

But what about the rest of the economy? Around three quarters of the Eurozone’s economic output, and of total hours worked, is in the services sector; this makes it the biggest influence on economy-wide labour productivity.

The figure above shows that, with the exception of Greece, labour productivity growth in services lagged behind the manufacturing sector.

“We think there are two main reasons for this trend. First, unlike for the goods market, the EU still has a lot to do to complete the Single Market for services. A possible implication of this could be that businesses adjust to competitive forces slower than they would have under a freer regime, leading to slower productivity growth,” added Boxshall.

“Second, there are some sector-specific reasons that could also explain this trend. For example, much of the services sector is relatively labour-intensive, with less scope for gains from technological advances and mechanisation. The financial services industry has also been subject to more stringent regulations after the crisis, which may be justified in terms of resilience and reducing systemic risk to the wider economy, but could also be having some adverse effect on productivity by restricting the activities they can undertake or deterring innovation.”

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