Productivity Will Bounce Back this Year, says Klaas de Vries of The Conference Board

The Covid-19 pandemic struck at a difficult time for economic relations. Productivity growth had already taken a knock in 2019 as a result of the trade war between China and the US, which created economic uncertainty across the world and held back business investment.

Klaas de Vries says the coronavirus crisis has weighed on productivity even further, as many companies were temporarily forced to halt trading during lockdown. Meanwhile, new rules regarding safety measures and social distancing are leading to increased costs and fewer sales for businesses when they do reopen.

However he is confident that productivity will bounce back later this year as trading returns to normal again, although some sectors will take longer to recover than others.

“Productivity will return to levels seen before Covid-19 hit, perhaps in the third or fourth quarter. There may be some positive impacts on productivity from this pandemic. Some weak firms will go under, but strong firms will do well. It could lead to a boost in churn between firms, which helps productivity performance as employees are able to share thoughts and processes with their new employers.”

The power of technology

De Vries says digital transformation will be key to business survival and growth when recovering from the pandemic. Big data, cloud computing and other new technology will become vital to business processes as remote working becomes increasingly common.

“I think digital transformation is definitely an area that is underleveraged by firms,” he adds. “Technology penetrates all layers of an organisation. Company balance sheets will be hit by Covid-19 and there will be a big focus on cost cutting and less on investing in new things. But what economists know is that if you are an early mover when it comes to innovation, you will have the advantage. It’s important to use technology to get a better idea of what customers need and to spot where the opportunities are. I would still recommend that businesses invest in new technology and processes if they can. If there is ever a time to change your strategy and make radical changes, it’s now.”

He adds technology is even more crucial as home working becomes more commonplace: “It’s come as a surprise to many people that more work can be done from home than initially thought. The impacts of this ripple through to the rest of the economy. There will be less commuting, less congestion. It could transform cities because you don’t need to live so close to work anymore. Some will go back to the office as the pandemic quietens down, but home working is here to stay.”

Economists broadly agree that productivity growth – or output per hour worked – is the main driver of economic growth, as it boosts the wealth of a country and gives governments more spending resource.

Low productivity growth is not a feature of all countries across Europe. The UK ranks the worst in Europe and has struggled since the financial crisis of 2008.  According to the latest data from The Conference Board, which publishes worldwide productivity statistics every quarter, growth of GDP per hour worked in the UK in 2019 was nearly flat at 0.1 per cent. This compares to annual growth of 1.1 per cent across all mature economies worldwide and 2.9 per cent growth across the 13 newer EU member states. However it’s important to note that Germany and France, which have high levels of productivity, also had flat growth last year.

De Vries says the UK’s weak performance is because there is a strong emphasis on jobs rather than the value added by each worker, or quantity over quality. Before Covid-19 hit, the UK had a record high employment rate of 76.6 per cent. But many jobs are low skilled and low paid, which generally stops firms from investing in improving efficiency because they know the cost of labour is cheap.

Some say part of the reason for the UK’s low productivity performance is because the economy is overwhelmingly reliant on the services sector, which makes up 80 per cent of GDP. However De Vries says this view is too simplistic and that the statistics don’t reflect  this. “In the UK, the manufacturing sector has been one of the weakest performers in terms of productivity growth over the past 10 years. Retail and professional services have been the sectors driving any productivity growth.”

Remote working boost

De Vries is undecided as to whether the trend towards more home working will boost productivity or not. On the one hand people can be less efficient as they miss out on physical interaction, which is important for bouncing around new ideas. On the other hand, remote working opens up the scope for recruiting employees further afield. From a macroeconomic perspective, this could mean countries get access to more high-skilled workers from other economies. Emerging markets then benefit as their population could get a quicker entrance into white collar jobs. “This may help reduce the gap between richer and poorer nations,” he says.

Many social commentators fear the increasing use of automation could lead to job losses. The “lump of labour fallacy” suggests the more you automate the less you need people, so in the end no one has a job anymore.

But de Vries says he doesn’t agree with this, as the strong employment data shows there is a need for people despite the huge technology developments that have taken place over the past 20 years.

“There will be more automation of things like petty cash management now, especially in sectors where it’s hard to find people. In the US, for example, there is a shortage of drivers and now we see driverless cars are being developed. Automation can also transform how you connect the different layers of an organisation and all your processes. It’s much more than just buying a new laptop or server. It should penetrate much deeper. So we mustn’t fear automation.”

De Vries’ key conclusions:

• Productivity growth this year will be skewed by the pandemic but should pick up again later this year
• Companies must avoid focusing on cost-cutting, and instead concentrate on how they can invest in new technologies that will help them stay efficient and competitive
• Working from home is here to stay, which could give companies access to more high-skilled workers from other countries
• Automation will increase, but this should be seen as beneficial for society