The top performers in this year’s Variables for Sustained Growth index are again dominated by Western Europe.
Ahead of the World Economic Forum at Davos, KPMG has released the second edition of the Variables for Sustained Growth (VSG) Index which measures countries’ productivity potential to illustrate where governments should be focusing efforts and investment in order to improve economic growth prospects.
The index considers 21 areas with some of these such as education, technology and strength of institutions, having the potential to greatly affect nations’ future economic growth and wealth.
The top performers in this year’s index are again dominated by Western Europe, with Singapore and Hong Kong the only non-European countries to make it to the top 10. The UK has climbed up to 13th from 14th place last year, ranking higher than France (23rd), the US (24th), and China (55th), but behind Switzerland (1st), New Zealand (11th) and Germany (12th).
According to KPMG’s analysis there are areas policy makers can focus on which will lead to greater improvements in economic performance than others. One of the most important levers for the UK is education where the country lags behind international rivals such as Canada and France, ranking 19th in our report.
A change in policy direction can also have a significant impact on a country’s economic performance which means, for the UK, the decision to leave the EU will likely affect the VSG score in the future.
Commenting on the findings, Simon Collins, UK Chairman of KPMG, said:
“Getting education right is critical to unlocking the country’s potential and closing the productivity gap. Our research shows that education is one of the most important catalysts for improving productivity and we’ve already seen countries such as France and Hong Kong take big leaps forward by improving their school systems. However, the UK still lies outside the global top 10.
“At the same time, there is a clear feeling of disadvantage and exclusion in society, exacerbated by concerns about job security and the impact of technology. Brexit gives us the chance to rethink how to design and build a winning economy and a more inclusive society. A highly skilled, innovative, creative economy will provide greater opportunities for more people. However, in order to make this transition we need substantial investment and collaborative thinking between government, business, and educators to deliver the necessary skills for decades to come.
“Businesses have a vital role to play in upskilling the UK’s workforce. In our own firm we invest heavily in education and training, employing 1,000 graduates and apprentices every year, providing the experience they need to progress their careers and advise our clients. Their fresh perspective and talent is vital to the future of our firm, and I consider this to be one of the most important investments we make.”
Of the five pillars, KPMG’s research shows that the strength of public institutions has the greatest influence on a country’s productivity potential. The UK remains in the top 10 for this due to the strength of the UK judiciary system, effectiveness of government and transparency of policy making.
The UK also scored relatively well compared to the rest of G7 countries on its ability to attract Foreign Direct Investment (FDI). However, both FDI and trade are areas likely to be significantly impacted as a result of the UK’s decision to leave the EU. According to recent research, leaving the European Economic Area (EEA) could result in losses of around 23-29% of UK’s total trade over the longer term. If this is the case, the UK’s VSG value for trade would almost halve thereby severely hampering our overall productivity potential.
Yael Selfin, Head of Macroeconomics at KPMG and author of the report, said:
“The world experienced a number of surprises in 2016 signalling that globalisation as we knew it may no longer work. The subsequent impact on the world economy from less trade and reduced flows of people and ideas as a consequence of this could be significant.
“The result of the EU referendum means the UK is one of the countries likely to see the most change as part of this shift. The strength of our public institutions such as our judiciary independence and business rights will help the UK retain and attract business. But as we leave the EU, the country needs to work harder than ever to demonstrate our doors remain open to the world.
“Those leading the charge on our international trade strategy need to make relationship building with global leaders a priority. This doesn’t just mean making new friends, it also means protecting where we can our relationship with the EU and the remaining EU countries. This is key because even after we Brexit, the bloc will continue to be an important trading partner for the UK.”
Infrastructure is another vital pillar in the VSG index which means improvements in a country’s score against this can have a significant impact on the overall productivity potential. While the UK scores relatively well against this pillar, our infrastructure score has decreased versus 2015 and it also hides a significant weakness in the quality of the country’s transport and telecommunications compared to some of our peers.
“This year’s report also makes it clear that infrastructure needs to be at the top of the agenda for Government in order to improve productivity and ensure the UK doesn’t slip during and after negotiating Brexit.
“The UK scores well below the G7 average for the quality of our roads, rail and air transport provisions, as well as demonstrating slow improvement to our mobile phone network compared to our European peers. While the Chancellor has recently committed funding to infrastructure upgrades, it is likely that more will be needed in order for the UK to catch up.
“Better transport infrastructure will improve inter and intra-regional connectivity while improvements in digital communications will better integrate parts of the economy and make our centres of growth more competitive. All of these are integral factors to boosting the country’s economic growth potential overall.”
Notes to editors:
KPMG’s VSG Index was originally developed in 2013 by members of the KPMG macroeconomics team in collaboration with external advisors. It covers 181 countries and tracks their performance across the productivity drivers since 1997. The VSG Index comprises 21 series, selected from academic studies and business survey results, which are divided into five pillars to capture developments in the major areas likely to influence productivity potential:
Download Variables for sustained growth 2016 index (PDF 1.8 MB)
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