Much to Be Optimistic About for UK Productivity

The UK economy has performed exceptionally well over the last few quarters and the election may put a temporary break on this. However, it is good news that Europe is looking stronger as it is the UK's main trading partner.

In the first part of this blog, I offered some observations on the economic picture in the Eurozone, and my take on the short- and medium-term outlook for US interest rates. Now, I turn to my homeland - the UK - and examine the prospects for growth in the light of global economic conditions and the prevailing political uncertainties ahead of next month's General Election.

The Office for National Statistics in the UK published figures relating to productivity for 2014. These confirmed that the economy is still less productive than it was in 2007.

Lower oil, financial services sluggishness, and lack of credit have been a drag

UK government data going back to 1948 shows that the economy is usually more productive four years after entering recession. The current stagnation is unprecedented and is difficult to explain. It appears that more people have been employed and they are being less productive.

There has also been a drag on productivity as a result of the fall in the oil price and the winding down of activity in the North Sea (partially related to oil being exhausted in some fields). The financial services sector has also had a negative effect on overall levels of productivity. Finally, investment has been weak in the UK, which has been attributed to a lack of credit available to companies and there needs to be a period of catch up in order for companies to improve productivity.

There is a strong correlation between growth in wages and growth in productivity. Wages are currently growing by 2 per cent per annum despite the poor levels of productivity. However, this cannot continue. Living standards will suffer if the UK does not start to improve productivity.

The Bank of England published its quarterly 'Trends in Lending' report in January, which covered the three-month period to the end of November 2014. Interestingly, it was reported that the demand for credit fell during the period from small companies, but it grew significantly from medium-sized companies.

My own company, Money&Co., lends to medium-sized companies and we are seeing strong demand from these companies. Many need money to finance expansion, including the addition of additional manufacturing capacity. This should help to improve productivity.

Stock market volatility will continue until there is certainty about the new government

The UK economy has performed exceptionally well over the last few quarters and the election may put a temporary break on this. However, it is good news that Europe is looking stronger as it is the UK's main trading partner.

The UK is also likely to benefit from the continued programme of quantitative easing in Europe. The stock market has been volatile in recent weeks, making new highs and then falling back. This is likely to continue until there is certainty as to the complexion of the next government. Nonetheless, there is much to be optimistic about and 2015 should prove to be a reasonable year for the UK.

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