As the Government’s latest productivity data reveals the weakest growth since Q3 2016, the Federation of Small Businesses (FSB) says the stats “demonstrate exactly what a prolonged period of uncertainty does to an economy.”

Productivity down on last quarter

Labour productivity is calculated by dividing output by labour input. But how does the report define output and labour input?

Output: gross value added (GVA), which is an estimate of the volume of goods and services produced by an industry.

Input:  Labour inputs are measured in terms of workers, jobs (“productivity jobs”) and hours worked (“productivity hours”).

The data in the Government report revealed that labour productivity in Q3 2018, as measured by output per hour:

• Grew by only 0.2% compared with the same quarter a year ago—the weakest growth since Quarter 3 2016
• Was estimated to have decreased by 0.4% from the previous quarter (Q2 2018); the report says this decrease in productivity reflected an increase in the number of actual hours worked, which outpaced output growth for the quarter

Whilst manufacturing experienced labour productivity growth of 1.7%, the significantly larger services only achieved 0.1%. Productivity hours worked increased by 1.3% compared with the same quarter a year ago, while the number of jobs increased by 1.0% over the same period.

Earnings and other labour costs outpaced productivity growth, resulting in unit labour cost growth of 2.8% in the year to Quarter 3 2018, compared with growth of 2.1% in the previous quarter.

“Productivity is important as it is considered to be a driver of long-run changes in average living standards,” says the Government in its report. So what’s behind these latest gloomy figures?

FSB national chairman Mike Cherry has a few theories.

Uncertainty; falling immigration; rising labour costs

Mr Cherry said the data reflects the long period of uncertainty that’s also resulted in small business confidence dropping to its lowest point since the financial crash. With four in ten firms expecting their performance to worsen in the months ahead, more than two thirds of small businesses are not planning to increase capital investment next quarter.

“Naturally small business owners are holding fire on investing for the future because – [with not long until] Brexit – they simply don’t know what the future holds,” he said.

He also believes that “plummeting” net migration from the EU over the last two years is making it harder and harder to bring in employees “with the skills and drive” to boost output per hour.

His other concern is soaring labour costs, particularly with minimum wage rates and employer auto-enrolment contributions set to increase again in April.

“We need to see the Government re-visit initiatives to support the smallest employers, starting with an increase in the now effectively-targeted Employment Allowance.”

And it seems his expectations for improved productivity growth in the near future are low too.

“Without investment in productivity-enhancing tech, machinery and skills, we’re unlikely to see these figures improve any time soon,” he warned.

You can read the full report here on the website of the Office for National Statistics (ONS). What do you think of the report? Please leave your thoughts in the comments below.

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Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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