Bloomberg Audio Studios, podcasts, radio news want to bring us back to the UK now, of course, the trade news on Friday adding a new layer of complications to the challenges facing the UK economy, but one that's been much more long running has been a lack of productivity growth.
Catherine Mann recently pointing it as to again one of the key challenges facing the UK economy, and new report by Boston Consulting Group is looking at this issue at a sector by sector level, showing Britain's biggest industries have been responsible for the decades long decline in productivity that's roughly half the GDP growth rate since the end of the nineteen nineties. Joining us now to discuss at role Ruperrell, who was director of BCG's Center for Growth or All
good morning. I will get to your report in just a moment, but as someone who's also a former advisor to the Prime Minister Teresa Aow when she was in that office, I'm just wondering what your perspective is on the trade situation. This morning, Donald Trump talking about a fifteen percent global TARFF. Now, of course it'd be an increase for the UK as well. I mean, is this particularly bad news for the government.
Yeah, well, good morning. It's obviously uncertain and adds another layer of difficulty for something the government to navigate. But I think it's still early days in terms of seeing where this lands and whether it will be an increase
for the UK. It's not entirely clear what it means for countries that have struck a deal with the US, whether this would supersede that, whether there would be another negotiation to try to bring down from it, and also then where this lands in the medium and long term
when they revert beyond this short term measure. So I think, look, it is another source of uncertainty, but the government and most countries have had to navigate this for the past year, and I think they will be taking it in their stride and trying to work behind the scenes and again re establish the deal that has been struck previously.
Okay, so that's interesting on trade, but as you say, I mean the uncertainty is perhaps a concern for the UK economy. And look, your research on productivity is very interesting. We know that the UK's had a productivity issue for for many years actually if you look at the data. But do you think in the work that you've done that the UK has a particular problem with productivity that is worse than other countries or than peers globally.
Yes, well, I think one of the issues we tried to unpack is doing a cross country comparison at the sector level to see whether the UK is falling behind piers, and I think what we see is that the UK is doing worse see in some big sectors than a number of peer countries and certainly then the global productivity frontiers. So for example, in financial services we have fallen back despite being quite close to the world leading into the
frontier in the nineties ninety two thousands. In manufacturing we've stagnated for a long period and the front has pulled away from US a bit, but that's true of most of the G seven in other developed countries. And then in information it comms the frontier is in the last few years at least accelerating away from the UK, driven particularly by the US. But the flip side of that is that the UK is actually still growing faster than the G seven in this sector. So there are different
things going on in different reasons. I would say info and coms the UK is doing quite well, but not quite as well as the best like the US, but in financial services and manufacturing we are falling back, although we are still better than peers in financial services in many cases.
Yeah, the financial services figures I find of particular interest. It seemed somewhat surprising that the UK would be, as you say, falling behind on this despite the strength of the sector overall. What's driving that, what's weighing on the sector?
Well, I think it's been a long term challenge post of financial crisis which the UK and other countries have faced. But I think there's probably a combination of obviously regulatory choices that the UK has made and maybe not quite getting the right balance in the medium and long term between risk and regulation. In terms of the financial services, we've also seen a shift in the nature of our
financial services sector in the UK. You know, we are less banking and investment banking dominated than we were back then before the financial crisis, and we've moved more to sort of xiliary services asset management, payments, etc. And these services are at least in the stats, inherently a bit less productive, but obviously they may present growth opportunities going forward in the future as other countries develop and maybe
demand more of these services. So it's a nuanced picture, but it does say that other countries have done a slightly better job in the post crisis period, even those that were hit quite hard by the crisis, such as the US, to diversify and continue to grow their financial services productivity, whereas the UK has been stagnating in this sector for essentially fifteen years.
Yeah, I mean the findings of the report are really pretty stark. You talk about the few sectors which were able to prop up the rest of the economy are no longer doing so. I suppose the big question from all of this research is what is the government doing about it? Now? What can it do to try to re energize an economy that on so many fronts is not performing as well as it should be well.
I think the point of our report was hopefully to highlight that, you know, you can take a nuanced and approach to this, and that there are certain sexual strength I mentioned info and comms where we are doing well and we are performing better than our G seven peers,
for example. But I think it speaks to needing different interventions for different problems rather than just doing a one size fits all approach, and I think there are sectors like manufacturing where the government is pushing on some of the structural problems we see that have held the sector back as a whole. We know they're working on planning, we know they're working on looking at energy prices to
an extent, but more needs to be done there. And then I think we also know there are some things going on in the financial services sector on the regulatory approach to try and find a better balance here. But yeah, it speaks to the need to continue to push and really focus in on these sectors that can drive growth.
And I think when it comes to the industrial strategy that seems to have fallen by the wayside a little bit, so making sure that as a focus in getting back to that core mission of driving growth will be really important.
What about the question of artificial intelligence In this we're constantly tell that there are huge productivity gains to be had from it. Does the UK look set up to be able to take advantage of those gains?
Well?
I think one thing that comes through from this report is that we do have a very long tail of low productivity firms. The number of low productivity firms has increased in real terms since nineteen ninety seven, for example, and so and the lowest five percent are actually less productive in real terms than they were in ninety seven.
And I think what that tells us when it comes to AI is that if you believe the productivity benefits from ar AI partly come through adoption, so this being spread across the economy and adopted by as many businesses as possible, that is something that the UK has traditionally not been great at. You know, that's why we have this long tail of low productivity firms despite the fact that some firms at the top of the productivity spectrum
are growing quite strongly. You know, we're not spreading that innovation, spreading new technology, spreading best practice. And so I think from an AI perspective, what the UK has to avoid is getting back into the same problem where we see a few firms at the top adopting it and getting productivity gains, and then a big gap between those in the middle and the bottom of the spectrum where it takes a lot longer for that to pass through. And if that happens again, I think we will miss out
on some of the potential productivity gains from AI. So there are definitely some learnings for how we should approach rolling out AI and maybe how the government can support the spread of best practiced the spread of innovation and helping businesses understand use cases and how they can start practically using AI and allowing the lowest productivity firms to catch up rather than just letting the most productive pull ahead.