Next week’s purchasing managers’ surveys are likely to report that both manufacturing and construction activity are weak. One reason for this, of course, is that uncertainty about Brexit is causing companies to delay investing in both new capital and in export efforts. The University of Tubingen’s Gernot Müller and colleagues estimate that by 2020 this uncertainty will result in the UK economy being 4 per cent smaller than it would otherwise be.
It’s not just output that’s suffering from Brexit uncertainty. It’s possible too that productivity is as well. One reason for this is that companies don’t immediately lay off staff when demand falters, but instead get them to do other jobs such as non-essential maintenance and repairs. The UK’s factories might not be very productive, but they are nice and clean.
There are other channels whereby uncertainty reduces productivity. One is that it causes companies to delay investing in labour-saving technology until they can be more confident that there’ll be enough demand to justify the outlay. There’s no oddity in employment increasing at a time of uncertainty. Faced with such uncertainty companies prefer to hire labour, which they can cut in a downturn, rather than be lumbered with expensive capital equipment.