Top of main content
UK in Focus: Raising UK productivity

8 Mar 2024

Key takeaways

  • While activity indicators appear to be improving after the UK

    fell into recession last year...

  • ...the UK’slong rungrowth challenges –particularly poor productivity –mightbe extremely difficult to overcome...
  • ...posing ongoing headwinds to UK living standards, corporate profits, the public finances, rates and GBP.

UK data review (December/January 2024)

  • UK GDP fell 0.1% m-o-m in December 2023 (consensus: -0.2%). Alongside downward revisions to October and November GDP levels, this meant it fell 0.3% q-o-q in Q4 2023, a second consecutive quarter of negative growth (after a 0.1% fall in Q3), meaning the UK ended2023 in technical recession. For 2023 as a whole, the UK economy grew by just 0.1% –the weakest annual growth rate since 2009 (excluding 2020). But we aren’t too worried, for two reasons. First, for most people, a recession will be associated with a risein unemployment, and latest data suggests the opposite is true. Secondly, the news from 2024 so far has been more positive, with rising real wages, falling offered mortgage rates, and recovering house prices.
  • UK CPI and core CPI inflation held steady at 4.0% and 5.1% y-o-y respectively in January, defying consensus expectations for an uptick. The RPI rate dropped from 5.2% to 4.9% y-o-y, partly due to softer housing components. Prices were surprisingly soft in components where we had expected positive baseeffects to kick in –namely air fares and hotels. And more broadly, there are encouraging disinflationary signs across the consumption basket, with sequential core inflation coming in somewhat below average.
  • UK labour market data for December were a little stronger than expected, in line with a broader pick-up in other economic indicators in recent months. Total pay growth slowed from an upwardly revised 6.7% 3m/yr in November to 5.8% in December (consensus: 5.6%). Regular pay was also revised up for November to 6.7% andslowed to 6.2% (consensus: 6.0%). In 3m/3m annualised terms, whole economy regular pay growth dropped to 2.2%, while private sector pay dropped to 2.6% –well below the 3.5% rate we think would be roughly consistent with the Bank of England’s 2% inflation target.
  • The UK composite PMI rose to 53.3 in the February flash from 52.9 in January (consensus: 52.9). That took the composite to its highest since May 2023 and bodes well for the UK exiting its technical recession.Within this, the headline services index was unchanged at 54.3 (consensus: 54.1), while the manufacturing PMI ticked up to 47.1 from 47.0 (consensus: 47.5).

Raising UK productivity

Pull the other one

With a general election fast approaching, it is understandable that politicians are talking about boosting economic growth. UK Chancellor, Jeremy Hunt, has said “smart” tax cuts are a route to economic dynamism. Labour leader, Keir Starmer –who polls suggest will be the next Prime Minister –has said he will pull “the growth lever”. 

UK productivity growth has slowed in the last 15 years...

The problem is, the UK has faced 15 years of lacklustre growth. At the heart of this lies an inauspicious shift in productivity performance. Before the Global Financial Crisis (GFC), UK output per worker grew in line with that of the US, at 2% per year. While much of the developed world has seen a slowdown since, UK trends have become more European. Over the past 15 years, UK productivity has grown at 0.5% per year, in line with the eurozone

Source: ONS, Eurostat, BEA, Macrobond, HSBC calculations*GDP per worker
Source: ONS, Macrobond, HSBC calculations

What’s gone wrong, and can it be fixed?

To work out whether a (metaphorical) ‘growth lever’ actually exists, it first makes sense to work out what lies behind the UK’s so-called ‘productivity puzzle’. To start, we think around a third of the shortfall versus pre-Global Financial Crisis trends reflects the end of unsustainable growth in North Sea oil output and the financial sector. Not much can be done about that. 

...dragged down by weak investment...

Much of the rest of the ‘puzzle’, we think, hinges on weak investment, driven by a number of headwinds which have become more acute in recent years. These include high house prices, costly infrastructure projects, restrained public investment spending and perhaps, more recently, Brexit. Some of these headwinds could be alleviated, but doing so may well be fiscally or politically costly. So,unless new technologies such as Artificial Intelligence come to the rescue, there’s a risk that the next 15 years might not look much better than the last 15.

Six inconvenient implications

...which could lower living sandards and profit growth

We see six implications of ongoing UK productivity weakness. First, lagging living standards. Second, paltry profit growth. Third, the government could face increasingly tough choices between raising taxes, increasing borrowing or allowing public services to atrophy. Fourth, limited cost-saving productivity growth might make it harder for central banks to deal with UK productivity growth has slowed in the last 15 years......dragged down by weak investment......which could lower living standards and profit growth inflationary wage ‘shocks’. Fifth, in the long run, low potential growth could keep long-run ‘equilibrium’ UK interest rates low –more in line with the eurozone than the US. And sixth, the combination of low growth and low interest rates could act as long-run headwinds to GBP.

 

Can things only get better?

Reform and focused fiscal policy to help longer term

There are things that policy makers could do, whether it’s planning reform or refocusing fiscal policy more towards investment. But either fiscally or politically, major reform might be hard to implement and might take a very long time to bear fruit. So,while we don’t think there’s much scope for the UK’s productivity woes getting much worse from here, it’s hard to see things getting much better any time soon. And until then, the adverse implications for prosperity, profits and policy, will be here to stay.

Source: S&P Global, Macrobond

Related Insights

There was no magic money tree this time, so tax cuts had to be funded by tax riseselsewhere, plus lower headroom. [8 Mar]
Markets are watching data closely for any signs of rate cut timing and magnitude in the…[4 Mar]
As we start a new year, it looks set to be characterised by rate cuts and elections…[11 Jan]

Disclosure appendix

Additional disclosures

1. This report is dated as at  23 February 2024.

2. All market data included in this report are dated as at close 23 February 2024, unless a different date and/or a specific time of day is indicated in the report. 

3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

4. You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument or of an investment fund.

Disclaimer

This document is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong and is part of the HSBC Group. This document is distributed by HSBC Bank Canada, HSBC Continental Europe, HBAP, HSBC Bank (Singapore) Limited, HSBC Bank (Taiwan) Limited, HSBC Bank Malaysia Berhad (198401015221 (127776-V))/HSBC Amanah Malaysia Berhad (200801006421 (807705-X)), The Hongkong and Shanghai Banking Corporation Limited, India (HSBC India), HSBC Bank Middle East Limited, HSBC UK Bank plc, HSBC Bank plc, Jersey Branch, and HSBC Bank plc, Guernsey Branch, HSBC Private Bank (Suisse) SA, HSBC Private Bank (Suisse) SA DIFC Branch, HSBC Private Bank Suisse SA, South Africa Representative Office, HSBC Financial Services (Lebanon) SAL, HSBC Private banking (Luxembourg) SA and The Hongkong and Shanghai Banking Corporation Limited (collectively, the “Distributors”) to their respective clients. This document is for general circulation and informationpurposes only. This document is not prepared with any particular customers or purposes in mind and does not take into account any investment objectives, financial situation or personal circumstances or needs of any particular customer. HBAP has prepared this document based on publicly available information at the time of preparation from sources it believes to be reliable but it has not independently verified such information. The contents of this document are subject to change without notice. HBAP and theDistributors are not responsible for any loss, damage or other consequences of any kind that you may incur or suffer as a result of, arising from or relating to your use of or reliance on this document. HBAP and the Distributors give no guarantee, representation or warranty as to the accuracy, timeliness or completeness of this document. This document is not investment advice or recommendation nor is it intended to sell investments or services or solicit purchases or subscriptions for them. You should not use or rely on this document in making any investment decision. HBAP and the Distributors are not responsible for such use orreliance by you. You should consult your professional advisor in your jurisdiction if you have any questions regarding the contents of this document. You should not reproduce or further distribute the contents of this document to any person or entity, whether in whole or in part, for any purpose. This document may not be distributed to any jurisdiction where its distribution is unlawful.

The following statement is only applicable to HSBC Bank (Taiwan) Limited with regard to how the publication is distributed toits customers: HSBC Bank (Taiwan) Limited (“the Bank”) shall fulfill the fiduciary duty act as a reasonable person once in exercising offering/conducting ordinary care in offering trust services/business. However, the Bank disclaims any guaranty on the management or operation performance of the trust business.

The following statement is only applicable to by HSBC Bank Australia with regard to how the publication is distributed to its customers: This document is distributed by HSBC Bank Australia Limited ABN 48 006 434 162, AFSL/ACL 232595 (HBAU). HBAP has a Sydney Branch ARBN 117 925 970 AFSL 301737.The statements contained in this document are general in nature and do not constitute investment research or a recommendation, or a statement of opinion (financial product advice) to buy or sell investments. This document has not taken into account your personal objectives, financialsituation and needs. Because of that, before acting on the document you should consider its appropriateness to you, with regard to your objectives, financial situation, and needs.

Important Information about the Hongkong and Shanghai Banking Corporation Limited, India (“HSBC India”)

HSBC India is a branch of The Hongkong and Shanghai Banking Corporation Limited. HSBC India is a distributor of mutual funds and referrer of investment products from third party entities registered and regulated in India. HSBC India does not distribute investment products to those persons who are either the citizens or residents of United States of America (USA), Canada, Australia or New Zealand or any other jurisdiction where such distribution would be contrary to law or regulation.

Mainland China

In mainland China, this document is distributed by HSBC Bank (China) Company Limited (“HBCN”) and HSBC FinTech Services (Shanghai) Company Limited to its customers for general reference only. This document is not, and is not intended to be, for the purpose of providing securities and futures investment advisory services or financial information services, or promoting or selling any wealth management product. This document provides all content and information solely on an "as-is/as-available" basis. You SHOULD consult your own professional adviser if you have any questions regarding this document.

The material contained in this document is for general information purposes only and does not constitute investment research or advice or a recommendation to buy or sell investments. Some of the statements contained in this document may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described insuch forward-looking statements as a result of various factors. HSBC India does not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investments are subject to market risk, read all investment related documents carefully.

© Copyright 2024. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED.

No part of this document may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.

Important information on sustainable investing

“Sustainable investments” include investment approaches or instruments which consider environmental, social, governance and/or other sustainability factors (collectively, “sustainability”) to varying degrees. Certain instruments we include within this category may be in the process of changing to deliver sustainability outcomes.

There is no guarantee that sustainable investments will produce returns similar to those which don’t consider these factors. Sustainable investments maydiverge from traditional market benchmarks.

In addition, there is no standard definition of, or measurement criteria for sustainable investments, or the impact of sustainable investments (“sustainability impact”). Sustainable investment and sustainability impact measurement criteria are (a) highly subjective and (b) may vary significantly across and within sectors.

HSBC may rely on measurement criteria devised and/or reported by third party providers or issuers. HSBC does not always conduct its own specific due diligence in relation to measurement criteria. There is no guarantee: (a) that the nature of the sustainability impact or measurement criteria of an investment will be aligned with any particular investor’s sustainability goals; or (b) that the stated level or target level of sustainability impact will be achieved.

Sustainable investing is an evolving area and new regulations may come into effect which may affect how an investment is categorised or labelled. An investment which is considered to fulfil sustainable criteria today may not meet those criteria at some point in the future.