Poor MSB productivity costs UK economy 117 billion

11 December 2014 Consultancy.uk 3 min. read
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The productivity of the UK’s medium-sized businesses is floundering behind Germany and France, costing the economy an estimated £117 billion, concludes a research from Grant Thornton. Creating the conditions to facilitate increased productivity and international expansion could create at least £50 billion for the UK economy between 2015 – 2020.

The state of medium business
There are 34,100 Medium-Sized Businesses (MSBs) in the UK, employing 4.2 million people. The annual turnover for this segment of the business landscape is estimated to be £712 billion (2013) – an increase of 7.5% compared to 2012 and estimated at a significant 21.7% of total private sector turnover. It is estimated the MSB added £270 billion in value to the UK economy (the sum of wages, profits and taxes on production), up from £254 billion in 2012; and equivalent to the value added of the real estate and the financial services sector combined.
The UK MSB landscapeMSB are anticipating faster growth in turnover (6.7%), exports (4.5%), capital investment (2.8%), and employment (2.7%) than the UK business population as a whole. Average salary growth too is expected to be higher for MSBs at 2.3%, compared to 2.1% for small firms, and 2% for larger businesses. It is estimated that MSBs injected £152 billion into household finances in 2014 through total employee remuneration, and are expected to hire 68,000 more employees. The average annual increase in gross profits for MSBs was up by 4.9%, for small businesses it was up by 4.4%; and 3.8% for large businesses.

The productivity gap
While on many fronts MSBs are outperforming their smaller and larger counterparts, not all is well for MSBs. In 2014 for instance, there has been a reduction in turnover of 0.6%, from £712 to £708 billion and there was also a sharp decrease in productivity, by 2.7%. In addition, the UK is in terms of productivity lagging behind other European countries, such as France and Germany, Ireland, and Austria. If UK MSBs were to close this productivity gap with the top 10 most productive EU countries, then an additional £274 billion in turnover could move through the economy. This is estimated to be worth £117 billion to the UK GDP, representing a 7.3% boost to total national output. This increase is estimated to be worth approximately £4,375 to each household in the UK, which translates to a 15% boost to UK household income from £28,500 to £32,875.

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“The reality is that MSBs have fallen behind despite the launch of targeted efforts from UKTI. Added to the flattening in turnover and dip in productivity performance, it suggests more needs to be done to promote productivity and growth,” says Scott Barnes, CEO of Grant Thornton UK. He suggests that in particular skills, exports and innovation should be boosted, and if done successfully they could according to Barnes add billions to the UK economy by 2020.

Labour productivity
The research by Grant Thornton corroborates with a similar study performed by the Bank of England, which revealed that the overall economy-wide labour productivity of the UK has dropped in the aftermath of the economic crisis. As productivity in other major European economies has grown since, UK’s relative position has deteriorated, described by the central bank as the ‘productivity puzzle’.

Whole-economy labour productivity per head across countries

Related news
Recently, BDO also released a research into the role of mid-sized businesses for the UK economy, which shows that they account for 75% of the UK exports and are responsible for 25% of all private sector employment.