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Summer Recovery in Productivity will be Short Lived

Statement following the Q3-2020 Flash Estimates of Productivity for the UK, 12 November 2020

By Prof. Bart van Ark, Managing Director, The Productivity Institute & Professor of Productivity Studies, Alliance Manchester Business School.

Key observations for the outlook on productivity

“The strong productivity surge observed during the summer is likely to be short lived. The latest national lockdown and further restrictive measures in coming months will dampen the recovery in the economy’s output, and the extension of the furlough program will help businesses to retain staff and working hours.”

“Looking to next year productivity growth remains challenged. Even assuming no third wave in Covid-19, wide availability of a vaccine and a soft Brexit – all big ifs –output is unlikely to recover quickly to pre-pandemic levels. Those on furlough will return to the workforce, though less efficient firms may go out of business which would partly offset productivity losses. There is also a possibility that working from home has a long-term positive impact on productivity.”

“Beyond next year productivity will depend on the same structural issues prevalent before the Covid-19 pandemic. These include the economy’s digital transformation and the extent of regional investment, plus the longer-term impact of Brexit. The newly established Productivity Institute is committed to provide thought leadership on how to tackle the productivity puzzle in the UK.”

Summary of the data

Labour productivity, measured as output per hour, surged at 5.2 percent in the 3rd quarter of 2020, following a decline at 2 percent in the 2nd quarter. Compared to the 3rd quarter of 2019, the improvement in productivity was 3 percent. This strong productivity improvement can be directly attributed to the economic recovery path over the summer following the first lockdown due to the pandemic earlier this year.

The flash estimate of productivity, which was released today by the Office of National Statistics, suggests that the economy recovered more strongly in terms of output than hours worked since the summer. This is especially true for the manufacturing and construction sectors, where output saw significant pent up demand. This is corroborated by the level of productivity which is substantially higher in several manufacturing industries compared to a year ago.

The services sectors saw a somewhat softer recovery in output and productivity compared to the previous quarter. Strikingly, hotels and catering, which is one of the sectors most exposed to physical distancing measures and temporary shutdowns, saw a more than threefold increase in productivity compared to the 2nd quarter. However, output in this industry was still almost 28 percent below the of a year ago, and 38 percent lower in terms of hours worked.

Over the summer output recovered at 15.6 percent from June to September after a decline of 19.8 percent between April and June. Total working hours recovered at a much slower pace of 9.9 percent during Q3 after losing 18.2 percent during Q2. The continuation of the furlough programme until September capped the rise in working hours.
The productivity estimates must be interpreted with more than the usual caution, as both the underlying output and labour input estimates are subject to significant revisions because of volatile movements of those variables due to the pandemic, especially for sectors in the economy that are most hurt by distancing measures, temporary shutdowns, etc.

Outlook for productivity

The strong summer productivity surge is unlikely to last during the final quarter of the year. New containment measures and a temporary national lockdown during the autumn is likely to slow the recovery in output though much less than the dramatic fall earlier this year. The furlough programme which has been extended through March 2021 will help dampen the loss in working hours, but limited business activity is likely to slow productivity growth significantly.

Looking out to 2021, a further recovery in productivity is highly uncertain. Assuming no third large wave in COVID-19, wider availability of a vaccine, and limited fallout from the implementation of Brexit, the recovery in output will proceed but levels of output will not return to pre-pandemic levels until much later. Despite a rise in unemployment, the ending of furlough scheme will restore hours of those employed. Productivity losses may in part be offset by increased productivity effects from restructuring. In addition, working at home practices may cause permanent productivity gains as firms rebalance remote and office working.

Beyond 2021 the productivity trend will depend on other factors related to the structural issues the UK economy has been facing for considerable time. The level of productivity in the UK has fallen considerably below that of other comparator countries in the OECD, including France, Germany and the United States. The pace of digital transformation, the effects of regional investments as part of the government’s levelling up agenda, and the longer-term impact of Brexit on the sector structure of the UK economy will be critical to a productivity revival in the UK.

Find out more about the Productivity Measures. 

Find out more about the Productivity Institute.

Twitter: @TPIproductivity@bart_ark