The Impact of the Financial Crisis on UK Company Performance

UK productivity fell sharply during the recession of 2008-9, and recovered only sluggishly after that. It currently remains substantially below a continuation of its pre-crisis trend. This contrasts very sharply with the experience of other post-war recessions in the UK when the fall was less sharp and the recovery quicker; it is also very different from experience in the US, where productivity has held up quite well, but where aggregate job loss has been more severe than in the UK.

Understanding the reasons for recent productivity weakness is of first order importance to macroeconomic policy, as stressed by both the Monetary Policy Committee and the Office for Budget Responsibility.

The main aim of the research is to investigate the underlying causes for recent productivity weakness in the UK, examining in particular the mechanisms by which the banking sector crisis might have affected the supply side of the UK economy, and focusing on how it has affected company performance. These mechanisms are identified by examining differences in the performance of individual firms or sectors according to their reliance on bank finance in order to grow. The research analyses company- and sector-level data from a range of secondary data sources, highlighting patterns in the data consistent with different explanations for the productivity slowdown. The research addresses the following questions:

1. How widespread across sectors and UK companies is the productivity slowdown since the financial crisis? How does this differ to the recession of the early 1990s?
2. What has been the impact of the banking sector crisis on bank credit conditions experienced by UK companies?
3. What are the mechanisms through which bank credit conditions might have affected the performance of UK companies and what are the magnitudes of these effects?
4. What is the evidence that UK productivity weakness has been associated with factors unrelated to tight credit conditions; labour hoarding in particular?

The main focus of the research is on analysing reasons for productivity weakness directly related to the banking crisis. One possible mechanism is that lack of credit availability has stunted the development of high-productivity, mainly young and small bank dependent firms and provided some protection for older established companies. In other words, the banking crisis may have reduced the efficiency with which inputs and outputs are allocated across firms. To investigate this, productivity growth is decomposed into productivity changes that occur because of developments within individual firms and productivity changes that occur because of changes in the efficiency with which resources are allocated across firms. If the banking crisis was an important contributor to UK productivity weakness, as distinct from recession, then the expectation is that productivity decline should have arisen in large part due to a drop in the efficiency with which resources are allocated across firms.

The research develops from existing data sources measures of the impact of the banking sector crisis on bank credit conditions experienced by different types of UK companies. Next it gauges the importance of tight credit conditions on company performance adopting a quasi-experimental approach, comparing outcomes for firms who are likely to be vulnerable to tight credit conditions to outcomes for firms who are less likely to be vulnerable to tight credit conditions before and after the financial crisis. The banking crisis provides in essence a natural experiment for studying the impact of tight credit conditions on real economic outcomes. The research studies the impact of the financial crisis on a number of company performance measures, including productivity, investment, firm survival rates, and job creation.

Although not the main focus, the extent of firm-level labour hoarding, and how this may have contributed to recent productivity weakness, is also analysed.

The research is highly policy relevant. It investigates the underlying causes of the sharp drop and sluggish growth in UK productivity since the financial crisis, examining in particular the mechanisms by which the banking sector crisis might have affected the supply side of the UK economy, and how it has affected company performance. Understanding the reasons for productivity weakness is of key importance for economic policy. On macroeconomic policy, different explanations would have different implications for how quickly output can expand when demand in the economy recovers (they imply different magnitudes of the output gap) and therefore the appropriate stance of fiscal and monetary policy; while on microeconomic policy, they would have implications for the design of appropriate support measures for business, and for policy on the banking sector and credit markets. Yet, hitherto, there has been little progress in discriminating between different explanations for the productivity slowdown. Both the Monetary Policy Committee and Office of Budget Responsibility have highlighted the 'productivity puzzle' as worthy of more in-depth research. Other policy-makers that are beneficiaries of this research include the Bank of England more widely, HM Treasury, and the Department for Business Innovation and Skills.

The wider public (UK residents) and UK companies are indirectly beneficiaries of this research, in so far as the research contributes to the effectiveness of policy geared at enhancing UK economic performance and the economic competitiveness of the UK.

The research will also provide valuable experience for the research staff involved, building the national skills base in the analysis and interpretation of large and complex datasets.