Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: And now onto today's show.
Speaker: This podcast was recorded on the 15th of February, 2024 by HSBC Global Research.
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Speaker: Hello, I'm P.S.
Speaker: Butler and welcome to the Macrobrief.
Speaker: On today's podcast, we're talking about an issue that has dogged Western Europe and the UK in particular over recent years, weak productivity.
Speaker: While productivity in the US has outperformed, it's been a far bleaker picture on this side of the Atlantic.
Speaker: So what's gone wrong and can it be fixed?
Speaker: To help find some answers to this productivity puzzle, I'm joined by Chris Hare, Senior European Economist.
Speaker: Chris, welcome to the podcast.
Speaker: Thanks, Piers.
Speaker: So the UK has faced 15 years of lacklustre growth, and at the core is this regular refrain of low productivity.
Speaker: So firstly, a Productivity 101.
Speaker: How is it measured?
Speaker: Well, put very simply, sort of mechanically, it's simply output per worker or per hour that we work, or GDP divided by employment.
Speaker: Or another way of thinking about it is we're working a certain number of hours.
Speaker: How much income or revenue are we generating in our industries or as a nation as a whole?
Speaker: And this is the thing that just seems to have sort of stagnated really over the last 15 years or grown a lot more slowly than the 15 years through the 90s and into the noughties.
Speaker: So as your report explains, there are in fact a number of reasons for this quote unquote productivity puzzle.
Speaker: Some are more obvious than others, at least when I read the report.
Speaker: So maybe let's take a look at some.
Speaker: Firstly, low levels of investment.
Speaker: I guess we can all relate to that.
Speaker: Yeah, that's right.
Speaker: If you look at investment to GDP ratios, for example, in the UK, they fell back quite sharply, really as early as the 90s or in the early noughties.
Speaker: And persistently low levels of investment, that has an impact on productivity because essentially we're
Speaker: you know using more labor and investing less in put very broadly machines or productivity boosting technologies now of course that then begs the question well why is investment so low and that opens up all kinds of broader issues which I guess we can discuss this point about labor is an interesting one because you you mentioned in your report that an increased labor force is actually a source potentially of lower productivity why is that
Speaker: Yeah, and this sort of relates to that investment point.
Speaker: We have seen in the UK very strong growth in labour supply, by which I mean levels of worker migration have been pretty high over the last 15, 20 years or so.
Speaker: And also there have been increasing numbers of older workers in the labour force.
Speaker: Now, employers can very understandably say, well, we've got lots of workers that we can draw from and essentially hire them to meet the demand that we need.
Speaker: Whereas, for example, if that labour supply wasn't growing in the same sort of way as an employer, you might want to invest in those productivity boosting technologies.
Speaker: So it's something that is sort of a good thing for the economy as a whole, but something that's potentially had a side effect where it's disincentivised that productivity boosting investment.
Speaker: We might come back to incentives for investment.
Speaker: But the other one that surprised me when I was reading the report is high house prices.
Speaker: Why is that?
Speaker: There's probably a couple of things that relate to a potential productivity sapping impact from high house prices.
Speaker: Now, one of those is that it could potentially tie wealth up into less productive assets.
Speaker: If you've got your wealth tied up in a house, well, that's potentially less productive than tying it up in a business or in equities, for example, where companies can then use those funds to invest.
Speaker: And there's potentially another thing going on.
Speaker: If house prices are high, particularly in high productivity areas, urban centres such as London, then it might price potential workers away from those high productivity areas and high productivity jobs in London, for example.
Speaker: So there's kind of two things going on there, which could be fairly significant in this story.
Speaker: And of course, if they move away from London, they could potentially come to London if there was a very fast train service.
Speaker: But as we know, the ballooning costs of HS2 make that less of a reality.
Speaker: And the point I'm trying to make here is incredibly expensive infrastructure is also a big drag.
Speaker: Yeah, by international comparison, infrastructure is expensive to build in the UK.
Speaker: By international comparison, I mean particularly compared to continental Europe and also Asia.
Speaker: Take rail, for example.
Speaker: There's an organisation in the UK, Britain Remade, and they did an analysis of the relative costs of building underground railway lines.
Speaker: Now in the UK their estimate of the cost is that it's over £600 million per mile to build those rail lines, whereas in Italy under £400 million per mile and in Spain under £200 million per mile.
Speaker: So enormous difference in cost there.
Speaker: But it's not just underground rail.
Speaker: It could also be high speed rail.
Speaker: The cost of nuclear power stations, for example, is much higher in the UK.
Speaker: Now, there are those who suggest that it's to do with the planning regulatory system or common law more broadly.
Speaker: And all these kind of things might be raising those infrastructure costs.
Speaker: But if infrastructure is costly, you're not investing in it.
Speaker: And those productivity headwinds associated with less good than you'd hope infrastructure could persist.
Speaker: Is that one of the reasons why productivity, because the UK was similar to the US and has drifted away from that, and we'll come back to looking at Europe, but is that why the US is doing so much better?
Speaker: Potentially it's not an infrastructure story because funnily enough actually the one country where infrastructure is if anything more expensive than the UK is in the US.
Speaker: Again it's got a common law system.
Speaker: But then you can argue that the US can find ways around this whether it's deep fiscal pockets from the point of view of the government or it's just got other things that mean that productivity is chugging away so nicely there.
Speaker: Maybe it's the tech sector and big R&D budgets that are able to overcome those issues associated with those high infrastructure costs.
Speaker: Right.
Speaker: So when politicians talk about pulling that growth lever, what can they in fact do?
Speaker: And for the UK, given this is an election year, how quickly can they pull it?
Speaker: There are certain things that could in theory be done, but they could be fiscally or politically costly.
Speaker: For example, you might want to raise levels of public investment, but that's quite difficult because the backdrop in terms of the financial
Speaker: public finances is very constrained.
Speaker: Or you could do things on the regulatory side, for example, liberalised planning laws.
Speaker: But again, that creates a lot of different political pressures, which could be quite difficult to implement.
Speaker: So in theory, things that could be done in practice, very difficult, and they may take a very long time to bear fruit.
Speaker: So when we're thinking about those headwinds to productivity, there's no quick magic growth lever, we think, that's going to really turn things around anytime soon.
Speaker: Do you think that's a disincentive for any new administration, that because there are not quick returns, there's always a problem in terms of political policy, that if you don't get quick returns, politicians are less inclined to adopt them?
Speaker: Well, absolutely.
Speaker: And potentially, that's been one of the issues over the last few years.
Speaker: We've, of course, had numbers of changes of governments, and it's very hard to implement long-term policies, which may cause short-term pain.
Speaker: So I think that probably is an ongoing issue.
Speaker: So when we talk to a lot of our corporate clients, for example, they like the idea of political stability and more long-termism.
Speaker: But let's see if that materialises.
Speaker: So you make your point in the paper, and we refer to it, that the UK has moved away from US levels of productivity towards European ones.
Speaker: Do they suffer from the same problems?
Speaker: Wouldn't Brexit have helped in that case?
Speaker: And more generally, are there examples of countries who have successfully pulled the growth lever and accelerated productivity?
Speaker: In terms of Brexit per se, usually the kind of things that cause weak or strong productivity are very slow burn things.
Speaker: So if the UK's vote to leave the EU only happened in 2016, actually the kind of impact on productivity may only just be starting to be felt.
Speaker: So I wonder how big a part of the story that is.
Speaker: Insofar as continental Europe goes, well, actually...
Speaker: productivity levels in number of countries, such as France, for example, are actually higher than the UK.
Speaker: It's just that those growth rates have been rather soft.
Speaker: So it's also struggled to pull the growth lever.
Speaker: In terms of those countries that really have pulled the growth lever, well, again, it goes back to the US.
Speaker: Productivity relative to the noughties is perhaps not as strong as it was, but it's still going very well indeed.
Speaker: In terms of other countries, potentially we're looking at EMs here, but more in terms of Central and Eastern Europe, the likes of Poland, for example, are seeing very strong rates of productivity growth.
Speaker: And it remains to be seen whether those rates of growth will continue as they start to converge towards the kind of technological frontier or richer economies.
Speaker: Will the recent growth data out of the UK focus the politicians' minds?
Speaker: Well, the recent growth data aren't great, to be honest.
Speaker: The UK is in a mild recession.
Speaker: Although some of the cyclical indicators for the start of this year are looking a little bit better, it is the case that GDP per person fell last year.
Speaker: So again, it really intensifies that productivity issue.
Speaker: So yes, there is a lot of discussion about productivity in this election year, but it goes back to the issue.
Speaker: Can it really be solved?
Speaker: It remains to be seen.
Speaker: It will take time.
Speaker: Chris, thank you very much for joining us today.
Speaker: Pleasure.
Speaker: Let's wrap things up with a look at some of the other key news from global research this week.
Speaker: The property sector is a crucial pillar of the Chinese economy, but it is continuing to feel the strain.
Speaker: New home sales are still sluggish and prices keep falling.
Speaker: Our chief economist for Greater China, Jing Liu, says the market can stabilize this year, and her report looks in detail at the policy options available to Beijing and what he could learn from Spain's similar experience.
Speaker: Elsewhere, Alastair Pinder, Head EM and Global Equity Strategist, has been looking at three key narratives driving equity markets.
Speaker: All eyes are on when the US Federal Reserve might cut and by how much.
Speaker: Investors are watching the economic data for signs of a soft landing, and in a bumper election year geopolitics are very much in focus.
Speaker: Alistair says the overall fundamental backdrop is strong, but a lot looks priced in.
Speaker: And finally, our next Live Insights event is not far away now.
Speaker: Join me on the 27th of February when I'll be putting your questions to our trade economist, Shanela Rajanagam.
Speaker: For details on how to register or for more information about anything we've talked about on the podcast, please email askresearch at hspc.com.
Speaker: So that's it for this edition of the Macrobrief.
Speaker: From all of us here at HSBC Global Research, thanks very much for listening.
Speaker: We'll be back next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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