UK Economic Outlook

Explore the causes and drivers of the UK’s productivity challenge and the gains from closing the productivity gap

November 2019

Summary

In our main scenario, we project UK economic growth to remain modest at 1.2% in 2019 and around 1% in 2020, somewhat below its long-term average rate of around 2%. These projections assume an orderly exit from the EU, however, risks are weighted to the downside over this period due to the possibility of a more disorderly Brexit as well as global economic risks.

Consumer spending has continued to drive the economy, helped by stronger real earnings growth over the past year. But the housing market has cooled and business investment has been on a declining trend as a result of Brexit-related uncertainty. Employment also fell back slightly in the third quarter from previous record highs.

We anticipate consumer price inflation to remain around or slightly below 2% along with the expectation that the Bank of England will keep interest rates on hold until the situation on both Brexit and the global economy is clearer.

Download the full report below for our detailed analysis, including special features on the UK’s productivity challenge, its causes and drivers, and the potential gain to the UK from closing international and regional productivity gaps.

Use our data tool to compare the productivity performance of different regions in the UK and how it has evolved over time.

The UK’s long-term economic challenge is to address the long-standing shortfall in productivity levels relative to other advanced economies

The latest data suggests that UK output per worker lags around 10-15% behind Germany, France and Sweden and more than 30% behind the US, although this gap is smaller when measured on an output per hour basis (except for the US).

Our analysis shows that, with the partial exception of Germany, these productivity gaps are not due to the UK having too small a manufacturing base. Instead they reflect lower average UK productivity within certain industry sectors (e.g. retail and wholesale) relative to other advanced economies.

Comparative international evidence suggests that relatively low UK levels of investment and R&D spending and a longer tail of companies and workers with relatively low productivity and skills are the main reasons for this productivity shortfall.

Future policy needs to be targeted on investing more in each of these areas, but business also has a key role to play in achieving these aims, notably through upskilling their employees.

Levelling up regional productivity across the UK could boost GDP by over £80 billion

We apply a regional lens to the ‘productivity puzzle’ by examining disparities in regional productivity and the causes and drivers of these differences. There is a significant regional disparity which has grown over time: London – the most productive Local Enterprise Partnership (LEP) – is now more than twice as productive as the least productive LEP in 2017, compared to 1.8 times in 2002.

While differences in the composition of industrial activity can explain some regional differences, variations in skills and connectivity appear more significant.

These findings suggest that both policymakers and businesses need to focus on upskilling workers, particularly in areas where there are skills gaps. Investing to improve the quality and capacity of local infrastructure could help boost the connectivity of a place (and consequently its productivity).

The economic prize for getting this right is potentially significant. If areas that are currently performing below the UK average can close 50% of this productivity gap, this could boost total UK GDP by nearly 4%, equivalent to around £83 billion per annum at today’s values.

Explore the data

See how productivity performance differs at the regional and local level using our interactive data explorer below.

Please select two regions or local areas to compare their productivity performance and their performance on the drivers of productivity, such as the industrial composition, connectivity, R&D spending, workplace skills and share of large enterprises.

The heatmaps below show how UK productivity performance differs across regions and local areas. Toggle between the years to see how productivity has changed over time across different areas.

Share of employment, % 2017
    PwC_Pictogram_Community_Black_RGB
    Share of large enterprises (with >250 employees) (2017)
    PwC_Pictogram_ConnectedTruck_Black_RGB
    Short-distance connectivity (2013)
    Digital connectivity (2017)
    PwC_Pictogram_ArtificialIntelligence_Black_RGB
    R&D expenditure as % of GDP (2016)
    PwC_Pictogram_Brain_Black_RGB
    % of occupations at SOC skills
    level 4 (2017)
    United Kingdom

    The maximum value (in grey text) for each bar is the highest regional value in that category.
    Short-distance connectivity: Score based on an area’s access to the economic mass of other regions
    Digital connectivity: Proportion of fixed broadband connections faster than 30 Mb/s
    SOC skills level 4 is comprised of professional occupations and high-level managerial positions in business or government.

    Sector definitions: Primary services include: Agriculture, mining, energy and utilities; Low value services include: Retail and wholesale, accommodation & food services, transportation and storage, administration and business services and arts, entertainment and recreation services; High value services include: Information and comms, Financial and insurance services, professional and scientific services and other services; Public includes: Public administration and defence, Education and Health and social care services.

    Real GVA per job,
    £ (2017 prices) 2002 for comparison
    £21k
    £77k

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    Contact us

    John Hawksworth

    Chief UK Economist, PwC United Kingdom

    Yong Jing Teow

    Economist, PwC United Kingdom

    Tel: +44 (0)7525 281974

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