Aurelia Butler

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This article is an on-site version of Free Lunch newsletter. Premium subscribers can sign up here to get the newsletter delivered every Thursday and Sunday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersWelcome back. Britain’s weak productivity growth has been scrutinised for well over a decade. It has spawned a sub-industry of research into its causes, splicing the problem by firm size, sector and region. The main culprits for Britain’s sluggishness have, however, remained mostly the same.So this week, I argue that there is no “productivity puzzle” in the UK.Economists tend to model a nation’s output capacity as a function of capital, labour and how efficiently it combines the two (also known as total- or multi-factor productivity). Output per hour worked is the most common measure of productivity.The slowdown in productivity growth following the global financial crisis is a worldwide phenomenon. But relative to its solid trajectory before, the UK’s drop-off has been starker.“Around one-third of the slowdown is a result of weaker capital per worker,” says Bart van Ark, managing director at the UK-based Productivity Institute. “The other two-thirds comes from poorer contributions from total-factor productivity.”Indeed, in the aftermath of the 2008 downturn, UK businesses expanded their production capacity mainly by increasing labour inputs. But in that period, broader efficiency improvements and investment lagged behind. Right now, Britain ranks middle of the G7 for productivity, with GDP per hour worked on a purchasing power parity basis around 20 per cent below the US. Some content could not load. Check your internet connection or browser settings.“UK workers have to make do with a third less capital per hour than their counterparts in higher-productivity peer countries,” says Tera Allas, senior adviser to McKinsey. “This has accumulated from decades of under-investment in equipment, research and development, training and infrastructure, by both the public and private sector.”In the past decade, business investment has also suffered from heightened economic uncertainty. This includes years of to-and-fro Brexit negotiations following the 2016 referendum, political turbulence (including six chancellors between 2019 and 2022), and a particularly tough pandemic period. Some content could not load. Check your internet connection or browser settings.As for poor TFP growth, there are multiple explanatory factors. For starters, poor investment can worsen efficiency outcomes over time. Using old technology impedes knock-on innovation. Infrastructure wears and tears, and can get clogged up as the population expands.“Every French city with a population greater than 150,000 has a mass transit system (tram or metro), while there are 30 British towns and cities that large that go without,” notes Ben Hopkinson, head of research at Britain Remade.Weak management skills are another challenge. A recent study finds that domestic manufacturing firms become, on average, 4.9 per cent more productive and 23.3 per cent more capital-intensive after hiring foreign managers. “The diffusion of best practices and technology across businesses and especially regions is also slower in Britain,” adds van Ark.Next, although English adults outperform the OECD average for literacy, numeracy and problem-solving skills, the country is the worst among rich nations at matching workers to jobs at the appropriate qualification level. More than a third of all vacancies in 2022 were the result of skill shortages, according to a Department for Education survey. Again, this is partly a function of investment, not just in absolute terms, but also in its distribution across the country. “By failing to build homes in and around our most productive cities, workers are priced out of living near well-paying jobs,” says Hopkinson. “The lack of reliable mass transit shrinks the effective size of our cities by limiting who can easily get to the city centre.”How capital is allocated also matters. In Britain, pension funds have been shifting money away from UK equities towards bonds for over two decades. This shift has not occurred in other major pension markets. This, alongside broader challenges in finding venture capital, has long sapped domestic companies’ ability to scale. Some content could not load. Check your internet connection or browser settings.Then there is red tape. For measure, the UK’s tax code comes in at 22,000 pages, more than any other country in the world. The Federation of Small Businesses estimates that a small company spends 44 hours per year on average on tax administration, at a total annual cost of around £25bn across all small enterprises.The code itself contains numerous inefficiencies that distort work, growth and investment incentives, including cliff-edges in income tax and business valued-added tax thresholds, and transaction taxes on property and stocks. UK tax expert Dan Neidle outlines these here.Building also requires hefty paperwork, which slows projects. As Britain Remade found, reopening a 3.3-mile train line to Portishead from Bristol took 79,187 pages of planning documents. Printed out, that’s 14.6 miles of paperwork — 4.5 times the length of the actual railway. The process has taken 16 years so far. (Construction should start soon.)There are two broader macro factors that tend to get lost in all the TFP microanalyses.First is Britain’s industrial electricity costs, which are the highest across the rich world. “As energy capacity has been destroyed or mothballed, it has not been adequately replaced,” notes Kallum Pickering, chief economist at Peel Hunt. “And since electricity availability peaked in 2005, Britain’s trend rate of productivity has slowed sharply.” Simply put, the more cheap energy available, the more goods and services can be produced per hour at competitive prices.Some content could not load. Check your internet connection or browser settings.Second is demand. Weak wage growth is itself a function of poor productivity growth. In Britain, since 2000, average earnings growth has only just pipped the change in price level. But the costs of compulsory expenditures — including house prices, council tax, utilities, education and childcare — have grown significantly higher than both wages and inflation in that time. Public sector inefficiencies are central to this.Squeezed household budgets crimp domestic sales revenue and impact investment plans. According to quarterly CBI surveys, throughout the 2010s, on average close to 80 per cent of UK services companies cited demand as a constraint on business. Over 50 per cent of manufacturing firms said uncertainty about sales limited capital expenditure over the same period.More recently, the UK’s departure from the EU has restricted the country’s access to a large external market. Demand for British exports has weakened since 2020.Some content could not load. Check your internet connection or browser settings.Some content could not load. Check your internet connection or browser settings.This is just a snapshot of the factors driving Britain’s productivity woes. Many rightly allude to measurement issues too. Output in service sectors, intangible inputs and knowledge are not easy to capture. That said, enough can be explained by clear obstacles to growth. “There isn’t really a puzzle here,” says Allas.It is, indeed, surprising how little these productivity blockers have changed from when I began my career at the Bank of England in the early 2010s: poor investment, scaling problems, regional inequalities, skills shortages, et cetera.Britain is still talking about the same problems. Admittedly, substantive political bandwidth has been absorbed by Brexit and the related instability. The investment problem has also recently garnered policy attention: the UK introduced a full expensing tax allowance for capital investment in 2023; the current government is focusing on the labyrinthine planning system and pension fund capital.Yet after over a decade of growth plans, white papers, government inquiries and think-tank research, Britain has little to show for it in on-the-ground growth improvements.The solutions are known, but delivering on productivity policy is hard. Retrofitting old, existing infrastructure can be costlier and harder than starting from scratch. Finding the optimal level of regulation isn’t easy. Major tax reforms risk alienating one group while benefiting another. Building irks NIMBYs. Reforms, for instance to healthcare, education and training, can take years to bear fruit, meaning they struggle to gain traction. Initiatives may not survive the next government, limiting their effectiveness.There is glut of research on why the country’s productivity has fallen, but far less action on designing practical solutions to turn it around. The UK isn’t alone here. Britain has a puzzle. But it is one of policy, not productivity.Send your rebuttals and thoughts to [email protected] or on X @tejparikh90.Food for thoughtThe analogy that free speech does not protect “shouting fire in a crowded theatre” has shaped US law for over a century. But this game theoretic analysis reckons its economic underpinnings could be faulty. Recommended newsletters for youTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up hereUnhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Boeing chief executive Kelly Ortberg said he was working with the Trump administration to ensure the company was not “an unintended consequence” of the trade war with China, suggesting countries buy more of its planes to reduce their trade deficits with the US.In an interview with the Financial Times, Ortberg, who took the helm in August, also said the launch of a new aircraft expected to replace its best-selling 737 Max was not an immediate priority, saying the “market is not ready now”. As America’s largest exporter, Boeing has been caught in the crossfire of Donald Trump’s volatile trade war, which has upended the aerospace industry’s decades-old tariff-free status, putting aircraft deliveries at risk and straining supply chains. Boeing was poised to restart deliveries of new planes to Chinese airlines next month, following a deal Washington struck with Beijing two weeks ago to reduce tariffs. But on Friday President Donald Trump accused China of backtracking on the agreement, raising the possibility of a Chinese response. The relationship between the countries is “dynamic,” Ortberg said, adding that he had learned not to “hyperventilate, because it’s probably going to change tomorrow”. “In the end, this is going to result in new trade agreements — that will be OK,” he said. Ortberg has said 2025 is Boeing’s “turnaround year”. More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldCanada’s steel industry warned of “catastrophic” job losses, factory slowdowns and supply chain disruption after US President Donald Trump doubled tariffs on imports to 50 per cent.Trump’s latest tariff move sparked anger across the border, as Canada’s Prime Minister Mark Carney had only last month travelled to the White House to repair relations frayed after Washington imposed heavy levies on its biggest trading partner.Canada is the largest supplier of steel and aluminium to the US, accounting for nearly a quarter of US steel imports in 2023 and about half of aluminium imports last year.“A 25 per cent tariff is difficult, but a 50 per cent one is catastrophic,” said Catherine Cobden, president of the Canadian Steel Producers Association.Steel is a C$15bn (US$11bn) industry that employs 23,000 Canadians and supports an additional 100,000 indirect jobs, according to the CSPA. “Steel tariffs at this level will create mass disruption and negative consequences across our highly integrated steel supply chains and customers on both sides of the border,” said Cobden.As newly elected prime minister, Carney went to the Oval Office in early May hoping to reset relations damaged by Trump’s threats to annex Canada and hit it with 25 per cent tariffs.The two leaders said they were open to renegotiating the US-Mexico-Canada Agreement, a trade deal that succeeded the North American Free Trade Agreement during Trump’s first term and is up for review next year.But on Friday, Trump told a rally in West Mifflin, Pennsylvania, that he would double steel and aluminium tariffs to 50 per cent, in an escalation of his global trade war.Cobden said Trump’s new threat “essentially closes the US market” to Canada and will “have unrecoverable consequences”.The Aluminium Association of Canada said they were waiting for “clearer and more formal legal confirmation” before commenting on the potential implications.International trade minister Dominic LeBlanc said Canada remained “resolute” in defending its workers and communities.“As we negotiate a new economic and security relationship with the US, Canada’s new government will stand strong to get the best deal for Canadians,” he said in a post on social media platform X on Saturday.The tariff announcement came in the same week Trump said it would cost Canada $61bn to be part of his ambitious “Golden Dome” missile defence shield but would be free if Ottawa gave up its sovereignty to become the 51st US state.A spokesperson said Carney “has been clear at every opportunity, including in his conversations with President Trump, that Canada is an independent, sovereign nation, and it will remain one”.The US president unveiled the increased levies on Friday as he touted a $15bn partnership between Nippon Steel and US Steel at a rally in Pennsylvania, promising to erect a tariff “fence” around domestic metals production.The new levies will come into effect on Wednesday, the president wrote in a Truth Social post following the event.Earlier in the week, a US federal appeals court paused a ruling that deemed Trump’s “liberation day” tariffs illegal.Canada has announced “a dollar-for-dollar” response to the US tariffs that will affect steel products worth C$12.6bn, aluminium products worth C$3bn and additional US goods worth C$14.2bn.These tariffs launched in March are on top of initial retaliatory levies on C$30bn of US goods. But in mid-April, Canada quietly softened its stance by easing some of the countermeasures on US carmakers and manufacturers.Canada’s ministers and provincial leaders are meeting in Saskatoon, Saskatchewan province, on Monday as part of Carney’s efforts to diversify the economy away from over-reliance on the US.“This isn’t trade policy, it’s a direct attack on Canadian industries and workers,” said Marty Warren, the United Steelworkers’ national director for Canada.“Thousands of Canadian jobs are on the line, and communities that rely on steel and aluminium are being put at risk. Canada needs to respond immediately and decisively to defend workers.”Goldy Hyder, president of the Business Council of Canada, said it was best “not to take the bait” from Trump’s statements and stay focused on a renewal of the USMCA.“These moving goalposts is just a strategy to try and get Canada to give more,” he said. More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldA US federal appeals court gave Donald Trump’s global tariff plans a temporary reprieve on Thursday, pausing a ruling that had found his “liberation day” levies to be illegal. In a ruling on Thursday, the US Court of Appeals for the Federal Circuit granted the temporary stay “until further notice”. The stay was issued hours after the White House vowed to go to the Supreme Court to try to overturn a judicial decision on Wednesday night that Trump could not use emergency economic powers to impose sweeping tariffs on trading partners.“This is a big victory for the president,” Kevin Hassett, director of the National Economic Council, said in an interview with Fox News. “President Trump’s case is iron clad . . . the bottom line is that President Trump’s trade team has their eyes on the horizon.”The latest decision marks a small legal win for the Trump administration but leaves the longer-term fate of its global tariff regime in the balance. The US can continue to collect tariffs while the stay is in place. On Wednesday, the US Court of International Trade’s surprise ruling delivered a blow to the president’s tariff plans and drew a backlash from the White House, which accused judges of “judicial over-reach”.“Three judges of the US Court of International Trade . . . brazenly abused their judicial power to usurp the authority of President Trump, to stop him from carrying out the mandate that the American people gave him,” White House press secretary Karoline Leavitt said on Thursday. “Ultimately the Supreme Court must put an end to this, for the sake of our constitution and our country.”A separate ruling by a district court judge in Washington also found the tariff scheme to be “unlawful” but gave the administration 14 days to appeal. Show video infoTrump’s top trade and economic advisers have insisted there are other ways for the president to pursue his global trade war — and that negotiations for deals with other nations would carry on. “We think we have a strong case. Yes, we will immediately appeal and try to stay the ruling,” Peter Navarro, the chief architect of Trump’s trade wars, told Bloomberg on Thursday morning.He said the trade court ruling showed the administration could also use different legal bases to impose a baseline 10 per cent tariff and higher “reciprocal” duties on many countries. “So nothing has really changed here in that sense . . . We are still, as we speak, having countries call us and tell us they want a deal. These deals are going to happen.”Wall Street analysts suggested the court ruling would slow down, but not derail, the White House’s plans. US stocks rose after the decision but the rally moderated, with the S&P 500 index and the tech-heavy Nasdaq Composite both closing up 0.4 per cent.“The administration is likely to either successfully appeal the ruling or to use other authority . . . to keep tariff rates high and revenue substantial,” Citi analysts wrote in a note on Thursday. “For now, the ruling will complicate and potentially delay trade negotiations.”Goldman Sachs president John Waldron told a conference in New York on Thursday that he still expected the US government to increase tariffs on most countries. “I think we’re going to go towards a 10 per cent universal baseline tariff with individualised, targeted tariffs on top with individual countries,” he said.Hassett also insisted that the Trump administration would be able to press ahead with its plans.“Trump does always win these negotiations because we are right. We are right that America has been mishandled by other governments, that our tariffs are taking them to the table, and they are coming in with massive concessions, opening up their markets to our products and lowering their tariffs on us,” he said.He added there were “different approaches” that the administration could take to impose tariffs if required, but added: “We’re not planning to pursue those right now because we’re very, very confident that this really is incorrect.”Additional reporting by Joe Miller in Washington and Martin Arnold in New York More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Bank of England governor Andrew Bailey has called on the government to “minimise the negative effects” of Brexit by seeking closer alignment with the EU.Bailey made the case on Thursday for non-tariff barriers to be reduced, particularly in the financial services industry, saying that less red tape would boost trade and economic growth.His comments come after Prime Minister Sir Keir Starmer unveiled the UK’s “reset” deal with the EU this month. It includes plans to cut barriers to trade in areas including foodstuffs and electricity.In a speech, Bailey welcomed the government’s efforts to increase trade with Europe but cautioned that Brexit had “weighed” on productivity and growth and suggested the UK and the EU should seek to further deepen their ties.Bailey joined forces in November with chancellor Rachel Reeves in calling for the UK to rebuild relations with the EU, at a time when fears were growing about a transatlantic trade war after Donald Trump won the US presidential election.The BoE governor, speaking in Ireland, suggested that more could be done to increase UK-EU trade in financial services, saying that a “two-way street” would deepen markets and benefit both sides.“There is merit in seeking to increase the openness of our financial markets by reducing non-tariff barriers,” he told a financial services dinner in Dublin.Reeves has argued that Britain should seek a closer trading relationship with the EU partly by agreeing to align rules between the two sides in “mature industries” such as the chemicals sector.Starmer’s allies have said the UK-EU reset deal was a starting point for negotiations about closer relations and that the confidence built by new arrangements could lead to more ambitious moves to boost trade in the future.Bailey said that, while he was not saying Brexit was “wrong”, it had created non-tariff barriers. “We should do all we can to minimise negative effects on trade,” he said.He was clear on the benefits to both the UK and EU economies of increasing the openness of financial markets by reducing non-tariff barriers, as he disputed the idea that trade was a “one-way street” from Britain to the bloc.“As with goods trade, open financial markets support economic growth as well as increasing investment and reducing the cost of capital,” Bailey said.He added that close co-operation between the UK and EU was increasingly relevant in the context of the “increased market volatility” observed following Trump’s tariff announcements. More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldThe key pointsUS Court of International Trade rules that Donald Trump does not have the authority to impose sweeping “liberation day” tariffsThis is not the end of Trump’s tariff mission, with levies imposed under other powers unaffected and lengthy court battles aheadThe ruling raises the possibility of much lower tariffs and the Fed lowering interest rates because disinflation is progressing as it hopedThe verdictOur base case is not to change our central scenario on this court decision. The Trump administration will first seek a stay to ensure tariffs can remain in place while the matter goes through the courts and there are many other routes the president can use to impose import taxes. The court’s ruling, however, increases the probability of a more benign tariff regime, with the US administration imparting less of a stagflationary shock than has seemed likely over the past two months. The detailsLate on Wednesday, the US Court of International Trade ruled that Donald Trump’s administration cannot use the International Emergency Economic Powers Act of 1977 to unilaterally impose unlimited tariffs on goods from nearly every country in the world.It said that Trump had exceeded his powers in using the 1977 Act because the tariffs imposed did not deal with the threats outlined by Trump and those in the law and the Act did not specify trade deficits to be an international emergency covered by the Act. The ruling applies to the “liberation day” tariffs, which now stand at 10 per cent for most countries under the climbdown Trump announced on April 9, a week after threatening higher duties. More from Monetary Policy RadarSee more articles from Monetary Policy Radar, a new product from the FT, which has been designed to boost investors’ confidence and help them anticipate future monetary policy decisions.The ruling does not end tariffs, however. The US administration last night said it would appeal against the ruling in action that would ultimately go up to the Supreme Court. In the meantime, it is likely to seek a stay of this ruling while appeals are ongoing, so that tariffs will not be dismantled quickly.The administration also has other vehicles it can use to impose restrictive trade practices. Section 301 tariffs are in place against China and are designed to counter practices deemed to be “unreasonable or discriminatory and burden or restrict United States commerce”. These can be set only after an investigation by the US Trade Representative. After a similar investigation, Section 232 tariffs can be levied on national security grounds and currently apply to autos, steel and aluminium.Part of the court’s reasoning that the International Emergency Economic Powers Act did not apply to trade balance concerns was grounded in another presidential power from 1974 to apply Section 122 tariffs of up to 15 per cent for 150 days to address “fundamental international payment problems”, including “large and serious balance-of-payments deficits”. These could easily replace the 10 per cent current minimum tariff applied by the US.Although Trump can appeal and still has other powers to impose tariffs, the ruling suggests his powers are weaker than we previously thought. It raises the chances of a more benign US trade policy, which does not impose as great a stagflationary impulse to the economy as previously expected. The odds of a benign outcome in which US inflation falls gently to target and output growth remains robust have risen. This raises the chances of steady interest rate cuts on the basis of good economic news. But we still judge the probability of this more positive scenario to be relatively low. More from Monetary Policy RadarFed minutes show ‘transitory’ inflation argument losing steam Concerns about more persistent pressure from trade tariffs were higher at the US central bank’s May meetingUS bank reform is unlikely to ease market interest rates for longChanges to bank capital rules are a short-term fix to the long term US debt problem More