Tech investment to solve UK’s productivity puzzle

By Mike King

With the UK economy showing signs of healthy growth, the days of doom and gloom seem to be behind us.  Important indicators such as headline growth (the UK economy is predicted to grow by 2.5% this year); growth in the UK job market (unemployment is now down to 7.1% and will drop below the Bank of England’s 7% threshold in the next few months); and rising UK house prices all point to prosperous times ahead.

However, there has been much in the media about the UK recovery not being as straightforward as these figures suggest and there are some interesting and unusual factors coming into play.  In particular, while employment is up and the job market looks to be very much in recovery, productivity is down. 

In other words, there are more jobs but, on the whole, we are producing less per worker.  This so called ‘productivity puzzle’ is baffling many economists as, in a recovery, the opposite should be happening and productivity should improve. 

Worryingly, these figures indicate that the UK is becoming less competitive internationally, with levels of productivity in the UK now on a par with Italy (a country in recession) and way below those in Germany and France.

One theory is that companies have been employing more people rather than investing in technology and this lack of investment in technology has meant that productivity has fallen.  This is partly because wages have remained relatively low – predictions are that in real terms wages are still at 2004 levels, and will not rise above their 2009 peak until 2019 or 2020.  It is also linked to difficulties companies have had in borrowing money or, for those with money, a tendency to hold on to what cash they do have. 

In the long run, if the economy is to continue to prosper something needs to change and, thankfully, there are early signs that business investment is starting to increase.  Given the position we are in, it is more crucial than ever that this investment is channelled into the right areas.  Making the right technology decisions now is critical to our future prosperity.