An article by John Mills, Chairman of the eponymous JM Ltd, author of economics books and major Labour party donor, claims that UK productivity is ‘so low’ partly because we spend a far lower proportion of our national income (17%) on capital investment (aka capex) than the 26% world average – and woefully less than China’s 45%
Not only that, what we do invest is not on things that increase our output per hour, and so our GDP growth rate:
- Most public capex is on roads, rail, schools, hospitals, public buildings and housing
- Most private sector capex is on office blocks, shopping malls, new restaurants and housing
Investment that does produce productivity growth is in technology, mechanisation and power – and most of this is made by the private sector, much in light industry which in the UK is mostly unprofitable
Hence the UK suffers from a lack of highly productive investments – hence, the ‘productivity puzzle’ will continue to persist
However, a surprise is in store!
A separate article by Joseph Sternberg, a political economist, in the WSJ (Wall Street Journal) claims that Germany also invests much too little
Apparently, throughout the 1990s and much of the 2000s, Germany was known as the sick man of Europe, weighed down by the costs of reunification, suffocated by high taxes and labour relations, and battered by the competitive pressures of globalisation
Today, Germany’s economy appears to be in a rude state of health – GDP growing at 2.5% p.a., a trade surplus of 8% of GDP, unemployment at a low of 3.7%
But these happy numbers mask what is set to become a debilitating drag on their economy – Germany is in the grip of a productivity crisis – stagnation will return as entitlement burdens become crushing
Germany’s reputation for efficiency is even misleading – the most productive industries are exporting manufacturers, and the most productive companies are large ones – but the great majority of companies are smaller service firms, whose productivity increasingly lags
Hence, the OECD (Organisation for Economic and Cultural Development) has announced a widening gap between their most productive companies and the rest:
- The best are not pulling others up by spreading their new technologies and methods
- Companies are not investing at home, preferring to increase their savings instead – the IMF (International Monetary Fund) claims that capex plays a smaller role in Germany than in any other major economy
- Most of Germany’s middling productivity gains come from companies figuring out how to do more with existing resources
- If they boosted their capex to the level of say Belgium (no less!), they would lead the world in productivity growth
So how could they do this?
Suggestions offered include:
- Encourage start-ups, since entrepreneurial firms typically take the lead in developing and diffusing innovations
- Encourage companies, especially smaller ones, not to store up so much cash to fund future R&D by providing alternative, more adventurous sources of finance
Clearly, these are ‘interesting times’ for Germany and the EU:
- The economies of EU Med members have all been described as basket-cases
- Most of the new Eastern Europe members are piggy-backing the richer members
- Brexit is about to happen which will significantly reduce EU central funds available – perhaps more for bail-outs than productive investments
- France’s economy and politics are delicately poised
- And now we find the strong man of them all, Germany, is not as strong as we thought
Conclusions:
- The UK should include productivity and payback criteria when making all its big capex decisions
- Remember Jeremy Grantham’s wise words about the ‘Catch-22’ for any firm trying to expand:
- The more it wants to grow, the more it will need to invest in both people and capex (plant and machinery) to meet expected rising demand
- That money must come from cutting dividends or increasing its capital base, say by issuing more shares
- Both are bad news for shareholders, the former reduces their returns, the latter dilutes their stake
- The EU, in its present form, has not got long to live