A quick, low-cost productivity booster

19 August 2024

A quick, low-cost productivity booster

The UK economic outlook has brightened in recent months. Growth has come back more quickly than expected, inflation is running at a third the levels of a year ago and last month the Bank of England cut interest rates for the first time in more than four years. Agreed, the UK has plenty of problems, above all a low rate of productivity growth. Even on this troubled front we’ve had positive news.

  • A recent study from the Office for National Statistics (ONS) shows a marked improvement in the average quality of UK management. The study, published in May, found that the average quality of management improved from 0.49 to 0.55 between 2020 and 2023. Firms have become better at managing staff performance and promotion and, in particular, more effective in dealing with underperformance.
  • The ONS does not offer reasons for the improvement. Our hunch is that as the post-pandemic jobs boom fizzled out, the balance of power in the jobs market shifted from workers to companies. With the labour market cooling, and the UK in recession in the second half of 2023, companies seem to have tightened up on performance management.
  • Unsurprisingly, management quality has a huge effect on productivity. (This helps explain the surge in a company’s share price when a new, highly rated CEO is appointed – and the depressant effect of the loss of a well-regarded CEO.)  Research by professors Bloom, Van Reenen and Sadun found that management practices explain 55% of the difference in levels of productivity in the UK and the US, countries that lead on productivity and management quality.
  • In the UK, management scores vary enormously across different types of business. The ONS finds that larger businesses do better than smaller ones in terms of management quality. Foreign-owned companies outperform UK-owned businesses. Family-owned or managed businesses tend to underperform on management.
  • So the form of ownership has a huge effect on productivity. Previous ONS research found that in the same sector and region and with companies of the same size, foreign-owned businesses were 74% more productive than UK-owned businesses. A working paper published by the UK’s The Productivity Institute earlier this year found that private equity ownership tends to raise productivity noting that, “active investors, such as PE and venture capital, provide important boosts to managerial skill sets and effective governance”.
  • Some important messages come out of all of this. First, and obviously, management quality is a crucial driver of productivity. Second, operating in the same environment some types of businesses – larger, foreign or PE-owned businesses – outperform in terms of management and productivity. Third, businesses can move quickly to sharpen management practices, as happened in 2023.
  • Unlike so many of the solutions touted for Britain’s productivity problem, management practices can be improved quickly, at relatively low cost and by the owners and senior management of the business. There is no need to wait until the UK sorts out its infrastructure, vocational training or any of the myriad of other factors that have been blamed for Britain’s low productivity growth.
  • The fact that foreign-owned firms get this right or that active investors can drive improved management quality, shows that this is a ‘portable’ advantage. The rise in the UK’s ranking in the ONS survey last year demonstrates that change can happen quickly.
  • UK management does quite well by international standards. The World Management Survey has been mapping management practices since 2003 and puts the UK in sixth place in a field of 35 countries. The UK comes ahead of France, Australia and Singapore but way below the US and Germany. The ONS concurs that the UK could do better. The ONS survey shows the UK’s quality of management score rising from 0.49 to 0.55. This is on a scale of 0-1.0, with 1.0 representing the ‘full implementation’ of structured management practices.
  • The long and agonised debate about Britain’s productivity problem has produced many theories but no quick, low-cost solutions. Sharpening management quality seems like a good place to start.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 1.8% at 8,311 as stock markets around the world recovered following sell offs the preceding week.

Economics

  • US inflation dropped to 2.9% in the 12 months to July, the lowest level since March 2021, reaffirming expectations that the Fed will begin to cut interest rates next month
  • US retail sales grew by 1.0% in July compared with the previous month, in part due to rising spending on cars and electronics
  • A survey of US small business managers found optimism at its highest level since February 2022
  • Together, this positive data has helped calm fears over an imminent US recession and has boosted investor sentiment – the S&P 500 stock market index closed the week up 3.8% to leave it just 2.0% below its record close in mid-July
  • The UK economy grew by 0.6% from the first to the second quarter, in line with expectations, as strong growth in the services sector offset falls in construction manufacturing output. Monthly growth was flat in June
  • UK wage growth slowed to 5.4% in the three months to June compared with the same period last year, the smallest rise seen in two years and likely to be seen as evidence that inflationary pressures continue to recede
  • UK unemployment fell to 4.2% in the three months to June, down from 4.4% in the preceding quarter. While this points to continuing strength in the labour market, concerns over low survey response rates mean many economists are not placing too much weight on the numbers
  • UK inflation rose to 2.2% in the 12 months to July, up from 2.0% the previous month as energy prices did not fall as steeply as they had a year ago. Despite this being the first increase in the headline annual inflation measure this year, on a monthly basis, consumer prices fell by 0.2% from June to July and the closely watched core and services inflation measures declined
  • British retail sales rose by 0.5% from June to July following a 0.9% contraction in the preceding month
  • UK renters are spending a record 28.8% of their gross income on rent, according to figures published by the ONS last week, as year-on-year growth in rental prices remained unchanged at 8.6% in the 12 months to July
  • The euro area posted growth of 0.3% in the second quarter, in line with expectations as employment grew 0.2% from the first quarter
  • Investor sentiment in Germany plunged in August, according to an influential survey by the ZEW institute
  • The World Health Organisation declared an international public health emergency following an outbreak of a more severe variant of mpox, formerly called monkeypox, in Africa
  • Sweden declared a case of the clade 1b mpox variant, the first outside of Africa as calls are made to speed the rollout of vaccines
  • Chinese industrial production rose 5.1% in July compared with the same month in the previous year as investment in manufacturing was up 9.3% in the first seven months of the year. The news will do little to assuage fears of industrial overcapacity in China
  • Meanwhile, house prices continued to decline in China for the 14th consecutive month while the inventory of unsold homes reached its highest level since 2016
  • Japan posted growth of 0.8% in the second quarter, the fastest quarterly growth seen in a year as rising wages fuelled an increase in consumer spending

Business

  • UK fintech Revolut sold shares held by employees that implied a valuation of $45bn, making it Europe’s most valuable start-up
  • Businesses have complained to the UK government that they are paying for physical customs checks that are not taking place following the introduction of a new post-Brexit charge on food and plants in April
  • The UK government offered train drivers in England a settlement comprising a 5% pay rise for 2022-23, 4.75% for 2023-24, and 4.5% for 2024-25, in a deal that unions will recommend to members
  • Iron ore prices hit their lowest levels in two years, in part due to weak demand from China, hitting the stocks of relevant large mining companies
  • Sales of individual annuity products in the UK rose 50% in the first half compared with the same period last year, as higher interest rates make the products more attractive

Global and political developments

  • Israel and Lebanon exchanged fire on Saturday as tensions remain high in the Middle East
  • The US, Qatar and Egypt proposed a ceasefire deal between Israel and Hamas. A further meeting is expected this week to discuss the proposals
  • US president Joe Biden said that such a ceasefire would likely reduce the risk of Iran retaliating against Israel for the assassination of a Hamas leader in Tehran last month as Iran rejected calls for restraint
  • Ukrainian troops are pushing to take more territory in the Kursk region of Russia, meanwhile Ukrainian authorities ordered the evacuation of civilians near front lines in Ukraine’s Donetsk region as Russian forces continue to advance in the east
  • Germany issued an arrest warrant for a Ukrainian diver in relation to the bombing of the Nord Stream pipeline in 2022
  • Paetongtarn Shinawatra, 37, daughter of former leader Thaksin Shinawatra, was appointed as Thailand’s new and youngest-ever prime minister
  • Japanese prime minister Fumio Kishida announced that he would step down in September
  • The US announced that it would ease restrictions on sharing some military technology with the UK and Australia, boosting the 2021 AUKUS agreement

And finally… tech news website The Register shared the story last week of ‘Paton’, a technician working at a prominent internet service provider in Africa several decades ago who was responsible for maintaining key internet infrastructure. The somewhat critical article claims that Paton rushed through an update to head outside for a cigarette break and returned to find he was responsible for the largest internet outage to hit Africa to date – puff piece