UK Productivity Crisis: The Challenge of Low-Performing Firms

The United Kingdom is facing a significant productivity crisis, characterized by a growing number of low-performing firms that hinder overall economic growth. A report from the Boston Consulting Group (BCG) highlights that the number of firms operating below the 25th productivity percentile has nearly doubled from 444,500 in 1997 to 873,000 in 2023, while the total number of firms increased by 70%. This trend indicates a troubling shift in the economy, as more firms are failing to improve their productivity levels.

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The BCG report emphasizes that the sectors traditionally responsible for driving productivity growth—namely information and communications, manufacturing, and financial services—have seen their contributions diminish significantly. From accounting for 84% of productivity growth between 1997 and 2007, these sectors contributed only 34% from 2019 to 2024. Raoul Ruparel, chief UK economist at BCG’s Centre for Growth, attributes this decline to a lack of "business dynamism," which has allowed less productive firms to persist longer in the market.

Economy bogged down by low-performing firmsReuters

The report outlines that the UK economy suffers from a "long tail" of unproductive firms, which stifles innovation and growth. High energy prices and slow diffusion of new ideas and technologies from leading firms to less productive ones are cited as contributing factors. Ruparel notes that while the most productive firms have maintained strong growth, the transfer of best practices and innovations to lower-tier firms has been inadequate, exacerbating the productivity issue.

Economy bogged down by low-performing firmsReuters

In response to the productivity crisis, Prime Minister Keir Starmer has pledged to reform planning rules and increase infrastructure investment. BCG advocates for a more aggressive government strategy that encourages "creative destruction," allowing struggling firms to exit the market while facilitating labor movement to more productive sectors. The report suggests that targeted solutions tailored to specific sectors are essential to address the unique challenges they face.

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Despite ongoing efforts by successive UK governments to tackle productivity issues, critics argue that these measures have been insufficient. The BCG report indicates that without a robust approach to dismantling low-performing firms and fostering a more dynamic business environment, the UK risks falling further behind global productivity leaders.

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• “We’ve seen lower productivity firms being able to survive for longer,” — Raoul Ruparel, Chief UK Economist, BCG

Economy bogged down by low-performing firms

• “We align with his view that we have a diffusion problem. We have some of the most innovative firms and, at the top end, our most productive firms have been growing productivity strongly…But then there is this long tail, and we’ve really struggled to spread best practice, whether that’s management techniques or new innovations.” — Raoul Ruparel, Chief UK Economist, BCG

Economy bogged down by low-performing firms

The BCG report underscores the urgency for the UK to confront its productivity challenges head-on. By fostering a more dynamic business environment and implementing targeted interventions, the government can work towards revitalizing sectors that have historically driven economic growth. Addressing the productivity crisis is not only crucial for economic recovery but also for improving living standards across the nation.

Economy bogged down by low-performing firms