Why down beat productivity figures are just plain wrong
NEXT week, companies on the London Stock Exchange will be involved in a promotion and relegation battle when the blue chip FTSE100 index is updated.
Favourite to fall out of the index (because its market value has shrunk) is the boiler-maker and engineering services group Babcock International, which has an industrial heritage dating back to the 19th century.
The odds-on favourite to replace it is the home food delivery service Just Eat, which is using the latest high-tech logistics to challenge the traditional high street restaurant industry by bringing cuisine straight to people’s homes via internet orders.
In many ways, the two firms represent the best of the old and the best of the new in British business. And it is the thrusting success of firms like Just Eat that lead me to believe the downbeat assessment of the economy by the Office for Budget Responsibility (OBR) after Wednesday’s budget is not only misguided but inaccurate. The OBR – set up by George Osborne to offer independent economic forecasts – says it’s very worried about productivity in Britain, based on the old-fashioned way of counting the output of each worker per hour.
But the fact is that while it’s easy enough to count how many widgets each person produces, for example, in a Babcock factory, the brilliant technology used by firms like Just Eat is far harder to quantify. The Office for National Statistics (ONS) in Britain, along with economists around the world, are struggling to come to terms with the digital technologies transforming every aspect of our daily lives.
That means our highly successful service industries, which don’t produce tangible goods, along with the development of Artificial Intelligence (AI), biotechnology and pioneering software in our great research universities, are not captured by the traditional models used to produce these financial predictions. That’s why
placing so much faith in the economic forecasts of the Office for Budget Responsibility is a huge mistake. With its gloomy forecasts, based on disputed measures of productivity, it’s doing Britain an enormous disservice as our nation strikes out on its own into a post-Brexit future.
Large parts of the Budget were about financing growth in innovative firms, supporting them via better infrastructure and through efforts to make teachers and young people more proficient at maths, computer coding and technology. Certainly, if Britain wants to keep up with digital nations such as South Korea and Singapore, it will need a huge investment push in ultra-fast internet and ‘5G’ mobile telephony.
The encouraging thing is that Britain is not coming at this from a standing start. Four of our top research universities, Cambridge, Oxford, Imperial College London and UCL, rank among the world’s best. Our continental partners have nothing to match them.
It is no accident that one of our leading pharmaceutical companies, AstraZeneca, is engaged in building an enormous billionpound research centre in Cambridge. Last year, the Japanese investment fund SoftBank paid an astonishing £24billion for Cambridge-based ARM, the global leader in creating the silicon chips that will run autonomous cars, wifi- connected household gadgets, and perhaps whole ‘smart’ cities in the future. Indeed, scarcely a day passes in the City of London without overseas investors seeking to buy into Britain’s pioneering technology.
The UK is the leader in online price comparison sites. Yesterday, Compare The Market was partly sold to a Canadian pension fund which placed a value of £2.5billion on the enterprise. It should come as no surprise that Britain, as the world’s leading banking and foreign exchange centre, is at the forefront of the latest in financial technology, too. The Bank of england has a fund that backs the new so-called ‘fintech’ companies – firms that increasingly make the world go round.
Worldpay, for example, is the leader in the payment systems used by the big global digital giants. The South Bank of the Thames in London is littered with hundreds of fintech innovators who will change the way we do banking. elsewhere, our digital industries are thriving.
edinburgh is the home of a world- class computer gaming industry. And it’s no accident that for a nation of shopkeepers, UK online fashion retailer Asos now has a higher market value than Marks & Spencer.
The trouble is, it’s very difficult for traditional measures of productivity to assess these cuttingedge industries, because what they create is not as tangible as the output of a car production line or an oil well. To its credit, the Office for national Statistics recognises this and is conducting studies so it can better understand why, despite the UK’s exemplary record of invention and technological advances, we lag behind our competitors in productivity. It is certainly not because British workers are lazier or less efficient than their counterparts overseas, or that we’ve failed to be ‘early adopters’ of new production techniques. After all, the advanced nissan car plant in Sunderland regularly comes out as the most efficient in europe.
The answer, in my view, is a deficiency in the data available.
The OnS is currently experimenting with a new measure of productivity called ‘multi-factor’, which seeks to embrace hard-tomeasure industries such as communications, broadcasting, software, mobile devices and the amazing IT in the City of London. The data up to now has been volatile and unreliable.
The bottom line for me is that it’s almost impossible to believe that in a nation where new technology is making such dramatic advances, the economy will stagnate in the coming years.