Brexit may shock UK firms in ‘productivity’

Bloomberg

Britain’s productivity malaise may find a solution from the unlikeliest of places—Brexit.
Poor productivity has long been the bane of the UK, with output per worker far below the Group-of-Seven average and successive predictions for a recovery since the financial crisis failing to materialise. Still, according to UBS Wealth Management economist Dean Turner, Britain’s exit from the European Union could be the catalyst that triggers an improvement.
His argument? While firms now have access to an almost unlimited supply of labour from the EU, tougher immigration rules will force a change in behaviour. If the costs associated with each employee increase, companies will be more likely to invest in technology and machinery that improve productivity. “There will be a deadweight loss to leaving the EU but it’s not as bad as the doomsayers suggest,” Turner said. “Immigration won’t come to an end, but it will become more difficult, and expensive. At the margin, the decision is: do I buy a piece of machinery for a plant or do I hire someone? If there’s a change in the plentiful labor supply, that could prompt an increase in investment.”
While there’s logic in the idea that firms may ultimately have no choice but to invest in productivity-boosting technology and resources, such measures would only filter through the economy slowly. They would offset the potential negative effects of leaving the EU, such as reducing trade and discouraging foreign direct investment.
Bank of England Deputy Governor Ben Broadbent made that argument this month, saying Brexit could trigger the type of “sharp step down” experienced after the financial crisis.

Budget Hit
The long-term weakness is already suppressing the economy’s potential and holding back wages. The country’s fiscal watchdog is also preparing to cut its productivity forecasts, which with repercussions for Chancellor Philip Hammond in his Budget this week.
The Confederation of British Industry says that UK firms are lagging behind many other European nations in the adoption of new technologies. Being more open to tried and tested innovation and management practices could add $132 billion to the economy and help reduce income inequality, it said this month.
At the other end of the spectrum, there’s evidence companies are still using outdated technologies.
An Amazon Inc.-commissioned report showed that more than 20 percent of small and medium-sized businesses said faxes play a role in their sales processes.
There are also vast regional differences to contend with. R&D spending in Wales, for example, is about half the UK average, according to KPMG.
With the economy close to full employment—the jobless rate is the lowest in more than four decades—others also say there must be a tipping point for investment. Holger Schmieding and economists at Berenberg said that the heavy reliance on labour and a reluctance to make big fixed-capital investments “cannot go on indefinitely.” But whatever sparks a change, the need for a solution to the productivity puzzle is becoming more acute.
The economy is already struggling to keep pace with its international peers, with growth this year forecast to be 1.5 percent, below that of the euro area and the US. The BOE was forced to raise interest rates because it’s worried that the weakness means the economy’s capacity to grow without generating inflation pressures has diminished. That lower speed limit is being exacerbated by Brexit, which is restraining companies’ willingness to invest.
There’s no agreed answer to the issue, with possible explanations including the UK’s reliance on services, which lag manufacturing in efficiency growth, “zombie” firms kept alive by low interest rates, and limits in the flow of workers between firms since the recession. With such varied causes, Hammond said recently that he doesn’t have the “magic bullet.”
Despite the years of disappointment, the BOE still expects a modest pickup next year, and Governor Mark Carney’s explanation echoes some of the theory behind Turner’s argument. After the bank’s rate hike, he cited better investment and a “shift between labour and capital.”
“We’ve had a jobs-rich growth model,” Turner said.

‘UK to make Brexit bill before summit’
Bloomberg

Chancellor of the Exchequer Philip Hammond suggested the UK will present a proposal to the EU for a financial settlement before a key summit of the bloc’s leaders next month, adding to signs that London is mulling potential concessions to break the deadlock in Brexit negotiations.
“We will make our proposals to the European Union in time for the council. I am sure about that,” Hammond said in an interview with the BBC. Asked if time was running out for the UK to make an improved offer on the exit bill, he replied that “the council is three weeks, so, yes.”
While Hammond is among the most pro-European members of Theresa May’s divided cabinet, his latest comments are in line with Brexit Secretary David Davis’s hint that more details on the exit bill may be presented within weeks. Environment Secretary Michael Gove said he wouldn’t block May from “doing what she believed was right” on the exit bill, in what could signal a willingness from at least part of the pro-Brexit faction to allow some flexibility.
“It’s not about demands, it’s about what is properly due from the UK to the EU under international law in accordance with European treaties,” Hammond said. “We’ve always been clear it won’t be easy to work out that number. But whatever is due, we will pay.”