European Levels of Productivity Likely to Recover in 2020

Klass de Vries, economist at The Conference Board in Brussels, discusses the prospects for European productivity levels in the wake of this spring's lockdowns. He explains why recovery is likely as businesses everywhere adjust to COVID-19 safeguards.

This interview is part of a series by Soldo, the prepaid company card solution that makes expense accounting simple. Read the full article here. 

Soldo: Klaas, what is it that you do at The Conference Board?

KLASS de VRIES: I’m an economist with The Conference Board, a think tank that looks at the biggest issues impacting business and how they can better serve society. We do quarterly updates on how global economies are faring. I also focus on productivity and trade, and my background is in history and productivity research.

Is one of the reasons for low productivity simply in the way it is measured?

2019 was a weak year for productivity growth, and this was mostly due to the global economic slowdown that started in the second half of 2018 due to trade uncertainties caused by political tension between China and the US. Productivity has been in slowdown for the past 15-20 years, even before the financial crisis took hold in 2008. It’s not necessarily that we’re getting less productive, it’s that the rate of increase is stagnant. The best way to measure productivity is to measure hours worked. But for most emerging markets we don't have reliable information on hours worked so the data isn’t always that accurate.

What impact will Covid-19 have on productivity this year?

It’ll come down to the distinction of using GDP per person - rather than per hour - as the measure of productivity. If that’s used, then productivity will go down enormously given the furlough schemes that have been put in place by many countries. The disruption in the first quarter was relatively subdued, and the biggest impact will be in the second quarter. But I expect there to be a rebound in the third and fourth quarters of 2020. Productivity will bounce back as output gradually returns and as businesses get back to work. 

What about the long-term impact?

There may be some positive impacts on productivity from this pandemic. Some weak firms will go under, but strong firms will do well. It could lead to a boost in churn between firms, which helps productivity performance as employees are able to share thoughts and processes with their new employers. A lot of new measures in place now could hamper productivity in the longer-term. New rules regarding safety measures and social distancing will add to businesses' costs and could mean they produce less.

Why does the UK perform so badly in productivity measures, when compared to other European countries?

 In the UK there is a very strong focus on jobs. There is a strong jobs market but lots of positions are low skilled and low paid. This stops firms from investing in improving efficiency as they know they can replace workers cheaply. Also the UK has a very strong emphasis on London, where jobs are more likely to be very productive and highly paid. But there is a huge difference between London and other regions. Hopefully there will be less emphasis on London after Covid-19 if more people work from home. 

How will the Covid-19 pandemic transform workplaces and working arrangements?

It’s come as a surprise to many people that more work can be done from home than initially thought. The impacts of this ripple through to the rest of the economy. There will be less commuting, less congestion. It could transform cities because you don’t need to live so close to work anymore. Some will go back to the office as the pandemic quietens down, but home working is here to stay. 

In your opinion, what is the one key thing businesses can do to boost productivity?

I think digital transformation is definitely an area that is underleveraged by firms. Technology penetrates all layers of an organisation. Company balance sheets will be hit by Covid-19 and there will be a big focus on cost cutting and less on investing in new things. But what economists know is that if you are an early mover when it comes to innovation, you will have the advantage. It’s important to use technology to get a better idea of what customers need and to spot where the opportunities are. I would still recommend that businesses invest in new technology and processes if they can. 

Will the increasing use of automation lead to job losses?

There will be more automation now, especially in sectors where it’s hard to find people. In the US, for example, there is a shortage of drivers and now we see driverless cars are being developed. But automation can also transform how you connect the different layers of an organisation and all your processes. It’s much more than just buying a new laptop or server. It should penetrate much deeper. So we mustn't fear automation.