What the economy is telling us (and what record employment levels may be hiding)
At face value, recent news highlighting record levels of employment would appear to suggest a very healthy picture for businesses across Wales, but look beneath the surface and it seems the welcome continued decrease in unemployment levels may be masking the real workforce challenge. The issue now appears to be more about underemployment, and the underutilisation of the existing workforce, which is having a direct impact on the levels of productivity.
According to the Office of National Statistics: ‘although employment is at a record high, there is evidence that some workers still want to work more hours than they are currently working. The proportion of part-time workers wanting to work full-time is still higher than in 2008, at 15% of part-time workers compared with 10% in 2008.’
Productivity issues have been talked about for decades, going back to the decline of the manufacturing industry, but this topic has become a more prominent feature in the media of late.
According to the chart below, the productivity problem has exacerbated since the financial crisis. Since then, interest rates have been on a continual decline, meaning that borrowing has been cheap, coupled with sustained low inflation levels, resulting in an unconducive economic backdrop to improve productivity. Companies have engaged in paying staff less and taking more individuals on part-time and zero hour based contracts.
(Woodford Funds, 2017)
It may be observed that the low interest rate environment has helped many companies stay afloat that otherwise would have not survived under different economic conditions. More so, those businesses that were not performing productively pre-economic crisis are in the same position today. Conversely, this period has presented the opportunity for companies that could access cheap credit to grow or remodel their business strategies. Additionally, cash rich new entrants that could navigate through the distressed economic conditions and grow via merger and acquisitions have also flourished.
Improving economic conditions
“Cumulative net finance raised in 2016, up to and including November was higher than in the equivalent period of any year since 2008.” (Bank of England, 2016)
The amount of finance available to businesses over recent years has incrementally increased. However, it is worth pointing out that since the financial crisis there have been significant changes to global finance regulations. Banks have been under immense pressure to enhance their capital ratio requirements and this has tightened how they lend to businesses. Prior to 2007/2008, there were loose regulations around lending, but in recent years businesses have had to demonstrate a profitable track record in order to gain access to capital. This has resulted in the emergence of new entrants in the form of challenger banks enabling more businesses to access much needed capital. It does appear though, that the trickle of capital has not filtered down to SME companies.
“The rate of growth in bank lending to large businesses has strengthened, while lending to small and medium-sized enterprises (SMEs) has slowed gradually since mid-2016.” (Bank of England, 2017)
Despite these reduced levels of finance, confidence levels among the SME community appear to be strong and resilient. In Wales, business confidence has been on the upward trajectory of late and, closer to home, the Swansea business community has continued to remain upbeat, no doubt bolstered by the announcement of the City Deal.
“Businesses across Swansea Bay continue to remain confident for the third quarter of 2017. 39 per cent of businesses surveyed said that they had performed stronger over the last three months compared to the quarter preceding it.” (Swansea Bay Business Club, 2017)
The recent launch of the Development Bank of Wales is also expected to increase the level and flexibility of finance to businesses across Wales.
So what does this mean for businesses?
Improved levels of business confidence, an easing of economic conditions and more capital flowing to the Welsh business community all seem to point to a steadily growing economy. This surely means more company start-ups, growth amongst existing companies and, ultimately, the need to lever more output from the existing workforce as well as new recruits. But hold on, employment levels are at a record high and there’s already a productivity issue within the existing labour market? The solution to this conundrum can only be a greater focus on more effective workforce development to support better recruitment, retention and talent management.
At ‘Better Jobs, Better Futures’, we have a team of dedicated Workforce Advisers who are here to support businesses to better plan and develop their workforce. Call us on 01792 284450 to find out how we can help you to solve your big workforce challenges and plan effectively for the future.
- (2017) The UK labour market: where do we stand now? https://www.ifs.org.uk/publications/9170
- Lamacraft (2017) https://woodfordfunds.com/words/blog/productivity-puzzle-2/
- (2016) Credit Conditions Review http://www.bankofengland.co.uk/publications/Documents/creditconditionsreview/2016/ccrq416.pdf
- (2017) Credit Conditions Review http://www.bankofengland.co.uk/publications/Documents/creditconditionsreview/2017/ccrq317.pdf
- (2017) https://businessnewswales.com/businesses-across-swansea-bay-continue-to-remain-confident-for-2017s-third-quarter/