The answer is remarkably simple. The make-up of our principal index bears little relation to the composition of the domestic economy. To put it into context, these giant concerns conduct the majority of their business outside the United Kingdom.
This does not, of course, fully account for the recent impressive performance of the Footsie, but it does give a clue as to why we have been outpacing other major markets recently. True, the rise is not as great if adjusted for the US dollar/sterling exchange rate, but because the greater majority of sales conducted by these companies take place overseas, the weakness of the pound rather perversely helps the performance of the index.
We have a reputation for failing to make the best of our workforce.
Companies like AstraZeneca and Unilever, two of the largest in terms of market capitalisation, are truly global businesses. Even HSBC, this country’s largest bank in terms of the value of its shares, is focused more towards Asian markets than those at home. Indeed, HSBC (the initials stand for the Hong Kong and Shanghai Banking Corporation) used to have its primary listing in Hong Kong and only moved its domicile to London in order to facilitate the acquisition of Midland Bank.
The recent announcement that AstraZeneca was to build a new factory in Ireland rather than in Britain highlights one of the problems facing the UK government. While the initial reaction was to blame the decision on the unfavourable comparison between the corporation tax rates applied in the UK and Ireland, with ours due to rise shortly, the situation is more complicated than simply trying to limit the tax burden.
Britain compares less well in two important areas when judged against other major economies. Both productivity and investment lag other G7 countries. Productivity in particular appears a problem that the government acknowledges, but so far has seemed incapable of stimulating improvement. And although productivity has been an issue for some time, it is since the financial crisis of 2008 that real concerns have been raised.
According to the National Institute for Economic and Social Research (NIESR), during the period from 1974 to 2008 productivity in the UK improved by an average of 2.3% per annum. Sustaining productivity growth is important if we are to maintain our competitive position in the world and improve the living standards of our population. However, in the period after the financial crisis, productivity collapsed to an average of less than 0.3%.
Other major economies were similarly impacted by the recession that followed, but not to the same extent. The United States achieved productivity growth of 1% during the period from 2008 to 2020; France and Germany just a little less. We may be talking about relatively small numbers here, but the compounding effect on our ability to compete globally should not be underestimated.
Sustaining productivity growth is important if we are to maintain our competitive position in the world and improve the living standards of our population.
What can we do about it? The new Prime Minister and his equally new Chancellor have trumpeted the attractions of technology industries as a way out of our apparent malaise. Arguably, America’s encouragement of technology has helped it stay ahead of the pack in the productivity race. But it is hard to believe that placing greater emphasis on these businesses will provide the silver bullet so sought after by the government. After all, the industrial composition of our economy has changed dramatically over the decades.
Poor industrial relations are often cited as the reason for our productivity lagging those of our competitors.
Which brings me to the second of our apparent current shortcomings. The lack of investment. This was cited by AstraZeneca as one of the reasons behind its decision to favour Ireland over Britain for its new manufacturing facility. On the face of it, the facts appear to bear this out. Figures produced by the NIESR show that public investment grew at an annualised rate of 4.5% from the immediate post-war years until 1979. Since then it has dropped to a mere 1.5%. Of course, many capital intensive industries have withdrawn from the UK during the past half century, but it is a worrying trend nonetheless.
Some of the blame for recent developments can be placed at the door of the period of austerity ushered in after the financial crisis and the restrictions faced by the government following the costly bail out of our economy during the pandemic. But these are problems faced by other nations as well. We have, sadly, a reputation for failing to make the best of our workforce, with poor industrial relations often cited as the reason for our productivity lagging those of our competitors.
Our next election is likely to take place in around two years’ time. The current administration will be lucky to have achieved a turnaround in such a short period and the Labour government in waiting are endeavouring to build closer relations with the business community. Whoever sits in Downing Street will have a tough task on their hands. Fingers crossed that appropriate medicine can be found for this very British of diseases.
Illustration by Adi Kuznicki