The explanations are, by now, familiar. Rock-bottom interest rates since the financial crisis helped some unproductive companies to keep going, distorting the normal economic cycle. As the fat hasn’t been trimmed in the usual way, there is seen to be less incentive for companies to make productive investments. It is more tempting for a company to support its earnings per share via a share buyback, for example. Ultra-loose monetary policy has also made it easier for all companies to hold on to their workers, even if they were producing less.
The poor outlook for productivity caused the Office for Budget Responsibility (OBR) in November to downgrade markedly its UK growth forecasts, “reflecting a reassessment of the post-crisis weakness and the hypotheses to explain it”. It now expects gross domestic product to grow by 1.4 per cent, on average, over the next five years.
This diagnosis has a high level of uncertainty, the OBR admits. But recent experience, the “prospect of continued subdued investment and historically low interest rates” has convinced forecasters that “some of the recent weakness will indeed prove more enduring”. And that’s without a disruptive Brexit.
It is difficult to change the big picture. But behind the buzzwords and the pictures of robots – a highlight on page 36 of 255 has one helpfully handing a screwdriver to a worker in Ocado’s (OCDO) warehouse – the industrial strategy is best understood as an attempt to do what can be done, within current constraints.
This includes getting research and development investment as a proportion of GDP from 1.7 per cent now, to 2.4 per cent by 2027 and 3 per cent over the longer term. Large businesses will get more of a tax credit for research and development (R&D) spend, and small businesses will get support to use the credits already available.
Added to this are ‘sector deals’; partnerships between government and industry, starting with life sciences, construction, artificial intelligence and the automotive industry. For pharma, that means R&D commitments from the government, and attracting investment from private companies and charities (which might of course have come regardless). For AI, that includes £45m to support PhD students, and the accompanying Industrial Strategy Challenge Fund receiving £725m to support areas of innovation. Then there is the physical and digital infrastructure spend, enhancing what has already been pledged.
Some of it is plugging gaps. The venture capital (VC) community fears the potential withdrawal of support from the European Investment Fund for domestic start-ups. So a new £2.5bn investment fund, to sit within the British Business Bank, will help young businesses scale up. It will be floated or sold, once it has established a track record.
But what about the developers that drive these start-ups? This pipeline is what concerns the VC sector today. An additional £406m for maths and technical education, including £84m for teaching computing science, makes a modest attempt at getting the young coders we need. But the bigger question is whether the sector can continue to depend on European workers.
The automotive sector receives some positive words on how the government can help improve the supply chain, including through an “industry-led supplier improvement programme”. But what about the biggest threat to the supply chain in the near term? “Brexit is the elephant in the room,” the Financial Times quoted an industry figure as saying. “Everything else feels irrelevant.”
The government knows this. The report concludes: “We want to have a continuing deep partnership with the EU that will not disrupt supply chains or impose barriers to our largest trading partner." European citizens living here will have their rights protected and the government will "develop an approach" through which they can continue to come.
Brexit overshadows, an overreliance on monetary policy constrains. As for improving output at the 'long tail' of less productive, smaller companies, we are promised yet another review. The robots can't answer all our problems.
Ian Smith is companies editor
