Record employment levels struggle to boost output - BDO

The UK’s labour market is booming as unemployment hits a new 42-year low but productivity is in “severe difficulty” as uncertainty continues to strangle output, according to the latest Business Trends Report by accountants and business advisers BDO.

The new report shows that while firms are continuing to hire more staff, business output is stagnant, again highlighting the UK’s long-standing productivity problem.

BDO’s Employment Index – which indicates firms’ employment intentions – is above the long-term trend and has risen 0.1 from July to 104.6, indicating that expected growth in new jobs over the next few months should be well above its long-term trend.

Hiring intentions have grown steadily for the last ten months, and this trend signals the continuing gradual strengthening of the UK labour market. In fact, according to official statistics, the 4.4 per cent unemployment rate is at its lowest in over 42 years, while workforce participation is at 75.1 per cent of those aged 16 to 64, the highest since records began in 1971. The strength of labour market demand is at a near record high with 768,000 advertised vacancies from May to July.

However, BDO’s Output Index – which indicates how businesses expect their order books to develop over the next three months – has remained stagnant at 95.1, very close to the point of contraction. The figures reveal the severe difficulty the economy is having boosting productivity during this period of economic uncertainty, which in turn is holding back pay growth.

Poor productivity has been a key factor in the low earnings growth over the last decade in Scotland and the UK. Against a backdrop of high inflation caused by the post Brexit vote sterling fall, household finances are feeling the squeeze. According to official statistics, prices of clothes, gas & electricity and food & non-alcoholic beverages have increased, somewhat offset by falling fuel prices. BDO’s Inflation Index now stands at 104.0 this month, 0.8 points lower than July. Despite this contraction, inflation expectations still remain well above the long-term trend, and therefore consumer spending growth is likely to stay subdued for the time being.

Martin Gill, Partner and Head of BDO LLP in Scotland, said: “These employment highs show that even in these uncertain times, businesses are really very happy to continue to hire. UK employment law is sufficiently elastic to give employers the comfort that they can flex workforces quickly as market conditions change.

“However, although new employment has increasingly consisted of proper, full-time jobs, these seem often to be low skilled and low paid. We’ve seen a decade of anxiety post the GFC and, no doubt, we have many years to come of Brexit related uncertainty. In this context, one can understand that employers have been happier to create low skilled jobs, which can quickly and easily be removed, rather than invest in expensive equipment, which might stand idle for years if demand forecasts prove over optimistic.

“The problem is that capital investment creates opportunities for higher paid employment, which Scotland and the wider UK is missing out on. We’ve seen this week that the Home Office could be adopting a harder line on unskilled migration to the UK post Brexit. If this approach gets traction, the labour market will run out of road pretty quickly. The resulting labour market squeeze will require some very difficult policy decisions to be taken.”

www.neweconomy.bdo.co.uk