Theme 1
Structure and Performance of the UK Economy
Policy questions and key messages
- How did UK sectoral productivity perform during and in the aftermath of the COVID-19 pandemic?
- How did the structure of the UK economy change over this period?
- How do these trends and patterns compare with those of other countries?
UK productivity rebounded quickly after the COVID-19 pandemic.
- Among the five economies examined, the UK experienced the most pronounced decline in labour productivity (-9.2%) in 2020. France followed with a decline of 7.3%, while Germany experienced a decline of 3.3%.
- However, in 2021 the UK displayed the fastest growth rate (8.8%), closing the gap on pre-pandemic levels. Switzerland followed with a growth rate of 5%, and Germany with 3.3%.
Knowledge-intensive services and manufacturing have led the COVID-19 recovery.
- Between 2019 and 2021, knowledge-intensive services and manufacturing saw some of the fastest productivity growth among the economies analysed. In the UK, for instance, labour productivity in manufacturing increased by 9.7%, while in information and communication it rose by 12.2%.
- This positive trajectory persisted to some degree in 2022. For example, Switzerland stands out for the rapid growth of its manufacturing industry, largely driven by its chemical and pharmaceutical industries. In contrast, the UK experienced a setback, with a decline of -3.3% in manufacturing value added in 2022.
Knowledge-intensive services are expanding their contribution to the economy.
- Between 2019 and 2021, knowledge-intensive services, such as information and communication and professional, scientific and technical activities, significantly increased their contributions to the economies analysed.
- In the UK, these sectors together accounted for an increase of 0.4 percentage points in employment shares and 1.8 percentage points in value added shares. Although their growth moderated in 2022, rapid expansions are expected to continue in the future.
Structure of the UK economy, 2022
- In 2022 knowledge-intensive[1] and labour-intensive services[1] contributed to approximately 80% of the UK economy’s gross value added and employment.
- While medium/high-tech manufacturing[1] accounted for 4.1% of gross value added and 2.4% of employment, this sector stands out for its contribution to exports and R&D. It represented the largest share of goods exports, amounting to 37.1% in 2021, and the second largest share of business R&D expenditure, approximately 41.1% in 2022.
- The main change observed in the structure of the UK economy, compared to the pre-pandemic period, is the expansion of knowledge-intensive services, as depicted in Charts 1.4 and 1.5.
Note: [1] Appendix 1.1 presents definitions of these classifications of sectors.
Labour productivity growth in selected economies, 2013–2021
- The economies analysed witnessed substantial declines in productivity in 2020, with the US being the only exception. However, all these economies resumed growth in 2021.
- Notably, the UK experienced the most pronounced decline in productivity growth in 2020 (-9.2%), followed by France (-7.3%) and Germany (-3.3%). However, in 2021 the UK displayed the fastest growth rate (8.8%), closing the gap on pre-pandemic levels (in real terms). Switzerland followed with a growth rate of 5%, and Germany with 3.3%.
- Recent research suggests that the US managed to record a positive productivity growth in 2020 (4.1%), because most of the jobs lost were in low-wage activities, and investment and capacity utilisation recovered rapidly.[1] The distinct treatment of furlough schemes also played a role.[2] For further insights on this issue, please refer to the related blog.
- Among the European economies studied, Switzerland saw the strongest productivity performance. This can be partly explained by its lower dependence on the hospitality sector and robust chemical and pharmaceutical industries.[3]
Source: [1] Stewart (2022); [2] Vries, Erumban and van Ark (2021) and Office for National Statistics (2020); [3] FDFA (2023) and OECD (2022).
Sectoral labour productivity growth in selected economies, 2019 ̶ 2021
- Across the economies analysed, the sectors that were impacted the most in 2020, such as accommodation and food service activities, the arts, entertainment and recreation, and administrative and support services, also bounced back quickly in 2021, albeit to productivity levels below those seen pre-pandemic.
- In contrast, knowledge-intensive services and manufacturing experienced among the fastest productivity growth between 2019 and 2021.
- Between 2019 and 2021, Switzerland led with the swiftest productivity growth in the manufacturing sector, at 17.8%, followed by the UK at 9.7%, and the US at 8.8%.
- The US (13.6%) and the UK (12.2%) also experienced the fastest growth in information and communication, along with professional, scientific and technical activities (the US at 15.1%; the UK at 6.5%), followed closely by Switzerland (at 6.3%).
- In financial and insurance activities, the fastest productivity growth was observed in Switzerland (10.2%), the US (9.8%) and Germany (7.1%).
Growth in value added and employment in selected sectors and economies, 2019 ̶ 2021
Differences in how sectoral productivity grew between 2019 and 2021 were identified.
- Knowledge-intensive services, such as information and communication, financial and insurance activities, and professional, scientific and technical activities generally experienced expansions in both value added and employment.
- In the UK these sectors together accounted for an increase of 0.4 percentage points in employment shares and 1.8 percentage points in value added shares.
- In contrast, the rapid productivity surge observed in the UK manufacturing sector in 2021 (Chart 1.3) is explained by a combination of increased value added and a reduction in employment levels. These figures should be interpreted in the context of both temporary lay-offs and labour shortages.[1] For further insights on this issue, please refer to the related blog.
- Across countries, the US experienced reductions in employment or slower growth than other economies. This may reflect the different treatment of furlough schemes, which was not reflected as a cost in value added in the US but had a negative impact on employment.
Source: [1] Make UK (2022); Randstand (2022).
Growth in value added and employment in selected sectors and economies, 2021 ̶ 2022
- Recent data shows that the information and communication sector maintained a positive trend in 2022.
- Except for Switzerland, professional, scientific and technical services also sustained a positive trend, albeit at a slower pace in 2022, and rapid expansions are expected in the future.[1]
- In contrast, the financial and insurance sector saw negative value added growth in 2022 in France, Switzerland and the US. In comparison, Germany stood out for its relatively strong value added growth in this sector (4.2%).
- Several countries have launched strategies to strengthen their manufacturing sectors, signalling an intention to expand this industry in the future. In 2022 expansions in employment were observed in all economies analysed.
- In terms of value added, Switzerland (6.8%) led the growth in manufacturing, largely supported by the performance of its chemical and pharmaceutical industries. In contrast, the UK recorded negative rates (-3.3%), with the largest falls (in absolute terms) observed across machinery and equipment, transport equipment and basic metals and metal products.
Source: [1] US Bureau of Labor Statistics (2023); McKinsey & Company (2020).
Appendix 1.1: Sector classification and statistical codes
