February 1, 2021

Could COVID-19 induced innovations have started a productivity turnaround in the UK?

In Q3 2020, a record 16% expansion in GDP helped push productivity in the UK – as measured by output per hour worked – to the highest it has ever been. Much of this can be attributed to sectoral factors, with traditionally low productivity sectors such as hospitality accounting for a smaller share of the economic pie because of the disproportionate impacts that COVID-19 restrictions are having on them.

But it is likely that the adaptations and innovations made by British households and businesses during the crisis have also contributed to the increase in productivity. The Cebr-Opinium Business Distress Tracker has consistently shown throughout the pandemic that the majority of British businesses have been making significant adjustments to cope with the challenges posed by the crisis. During the current lockdown, around one in eight British businesses are using their spare capacity to improve existing products and processes, with an even larger share developing new products.

The pandemic is the greatest economic and social upheaval since the second world war. Events on this scale leave their mark on the trajectory of human development. Advances in the fields of computing, transport, energy and even food preparation during the second world war transformed the way we live our lives today, paving the way for mass air travel via pressurised cabins, supermarket ready-meals courtesy of microwave technology and even the ubiquity of Coca Cola.

This time around, the huge resources that have been poured into the development of COVID-19 vaccines have led to major strides forward in the application of synthetic messenger RNA – a medical technology whose possible applications extend far beyond the sphere of COVID-19. With lockdown restrictions precluding millions of businesses’ previous operating practises, firms were often faced with a fairly binary choice: innovate or shut down.

The pandemic has created opportunities for dynamic and innovative market entrants to offset the impact on less productive businesses, who have been forced either to adapt or close down. While this type of creative destruction generates hardship for those on the receiving end of it, the process is an important component of long-term economic growth.

Signs of a rise in innovation are starting to be borne out in the UK data. During the height of the first wave of the pandemic in Q2 2020, more than 5,000 patent applications were filed – an 8% increase on the number recorded during the same period in 2019.[1]

The number of trademark applications submitted in the UK was 23% higher in Q2 2020 than in Q2 2019.

Among the economic difficulties and news of businesses shutting down, many haven’t noticed that more than half a million (599,000) new companies were incorporated during the final nine months of 2020 – a 21% year-on-year increase.[2]

In Q3 alone, a record 221,000 new businesses were created. The sharp jump in the number of new businesses is likely to reflect both innovation and upheaval.

The pandemic is of course an international phenomenon, so it is interesting to see what has been happening elsewhere. The picture is mixed. In the US, too, a record number of new businesses were formed during the third quarter of 2020.[3] Comparable data in the European Union is less easily available but an article for VoxEU last summer was pessimistic about performance[4], presumably because of the less supportive business environment. The number of venture capital funding rounds in the EU in 2020 halved[5].

It is far too early to tell how this will pan out. And there are fears that the rise in corporate debt levels that has taken place during the crisis will hold back investment (and therefore innovation) in the coming years as businesses focus on repairing their balance sheets. These concerns are certainly valid, and Cebr has called for creative solutions to alleviate businesses’ debt burden during the recovery. However, with a little luck and sound policy, the crisis could prove to be a match that re-ignites the UK’s productivity performance.
 

[1] Intellectual Property Office
[2] Companies House
[3] https://www.census.gov/econ/bfs/pdf/bfs_current.pdf
[4] https://voxeu.org/article/challenges-and-opportunities-start-ups-time-covid-19
[5] https://sifted.eu/articles/2020-european-tech-data/

Contact: Pablo Shah, pshah@cebr.com 079579777522

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