As private sector productivity continues to stagnate, the UK government’s industrial strategy has the potential to help drive growth in key high value-added sectors. However, the lack of focus on customers does not bode well, as Thomas Aubrey discusses in comparing the Sector Plans for Defence and Life Sciences.
The latest productivity figures will not provide any comfort for the Chancellor as she prepares for the Budget on 26 November 2025. Private sector productivity growth between Q2 2019 and Q2 2025 stagnated. And although the flash estimates for Q3 2024 to Q3 2025 indicate a 1.1% growth rate including the public sector, there is still not much evidence that private sector productivity is breaking out of its low growth trend.
While value-added per hour within sectors increased by 3.8% over the period, the reallocation of labour between sectors indicates a shift towards lower value-added sectors, effectively cancelling out this growth (Table 1).
Moreover, although 45% of the private sector contributed positively to growth (in green), 50% of the private sector contributed negatively (in red). Hence one major challenge for the government is what it can do to stop the high value but negative growth sectors from driving down the overall rate of growth.
Table 1: Sectoral productivity disaggregation Q2 2019 – Q2 2025[1]
One reason behind this dismal performance has been the ongoing decline in manufacturing, which is a high value-added sector at £50.90 per hour. Although labour productivity growth within manufacturing sectors was 1.1%, reallocation to lower value-added subsectors led to a decline of -2.2%.
Due to ongoing issues with the Labor Force Survey, the ONS is still unable to provide sufficient data to help understand what is driving this underperformance. However, growth in real gross value-added (GVA) over the period provides some insight into the relative competitiveness of each subsector as set out in Table 2.
The data reveals a significant variance from a 38% increase for Pharmaceuticals to -27% for Chemicals – both of which are high value-added subsectors.[2] The government should also be concerned about the decline of the Chemicals sector given its close supply chain links to Pharmaceuticals, which has been one of the few recent UK success stories.
Table 2: Manufacturing subsector GVA growth Q2-2019 – Q2 2025
Turning to the second GVA growth success story, Transportation equipment, chart 1 provides additional information. While motor vehicles accounts for 46% of GVA and has grown by 42% over the period, it has been in decline since Q1 2024, exacerbated by the JLR cyber-attack this year. Moreover, the UK automotive sector is under increasing competitive pressure from good-quality, low-cost electrical vehicles from China.
While aerospace has grown by 17% over the period and is 41% of the subsector, shipbuilding experienced the fastest growth of 68% over the period and now accounts for 11% of the subsector. This output, which is dominated by defence procurement, will continue to grow as defence expenditure rises, along with defence exports.
Chart 1: GVA Transportation equipment manufacturing
Source: ONS
Annual capital expenditure by the Ministry of Defence (MoD) has typically risen since 2015 with 18% of the overall budget oriented towards military equipment (£9.8bn). The last published MOD Equipment Plan indicates that over the ten years from 2022/23 the MoD plans to spend £242 billion on equipment procurement and support. 43% of the planned expenditure is oriented towards the submarine-based Defence Nuclear Organisation and Navy Command.
Critically, the Defence Industrial Strategy explicitly recognises the role of the MoD in using its buying power to support economic growth. It also recognises the importance of boosting exports and has set up the new Office of Defence Exports inside the MoD. This new body will focus on developing government to government relationships, while ensuring from the outset procurement is optimised to meet the needs of the Armed Forces as well as the export market. The recent successful export of the Type 26 Frigate to Norway is a case in point, with exports of the Type 31 to Denmark and Sweden potentially following.
These deals will likely boost productivity through higher GVA and labour share in high value-added activities. Moreover, as UK defence firms with a competitive advantage scale-up by selling more of their products and services to the UK government as well as exporting, they should be able to continue to enhance their performance. The focus on customers in the Plan is therefore very welcome.
However this is not ubiquitous across the Government’s sector plans. The Life Sciences Sector Plan which includes Pharmaceuticals and MedTech, expects to spend over £2bn supporting the sector across multiple areas in the hope that this will maintain the sectors’ trend growth rate, generating an additional £41bn by 2035. But it is almost entirely focused on what government is going to do. Yet productivity takes place in firms, not in the corridors of Whitehall. The maritime defence sector benefits from the fact that it is dominated by a few large manufacturers and a limited customer base. This is particularly relevant for the UK because its sectors do not function as a coherent entity unlike countries such as Germany.
While the Life Sciences Plan includes a series of actions around streamlining access to the NHS and an NHS Innovator Passport enabling innovative Med Tech products to reach patients more quickly, the Plan recognises the UK is viewed as a comparatively low payer for medicines and medical technologies. Indeed, pharmaceutical companies are already shifting their investment elsewhere as a result, which will drive the sector’s GVA down. The fact that the government plans to spend money on improving the procurement process may therefore have no impact on the uptick of sales of innovative products and their wider adoption.
Moreover, the exports action plan suggests a continuation of the “Government’s global trade promotion and diplomatic network, as well as utilising a portfolio approach of export missions, global exhibitions, international partnerships, networking facilitation with industry alumni, and dedicated account management.” But this approach has not been successful, in contrast to Germany where firms and their trade associations work together to identify the opportunities in lucrative markets, with additional government support where necessary.
Chart 2: UK vs Germany exports of goods % of GDP
Source: LSEG Datastream
In conclusion, while the outlook for the maritime Defence Sector looks positive, the lack of focus on customers in the Life Sciences Plan may ultimately be its undoing. Unless UK firms are able to sell more of their products and services, enabling them to produce at greater scale, productivity will continue to stagnate.
[1] The sectoral disaggregation uses GEAD (Generalized Exactly Additive Decomposition) based on Tang & Wang (2004). The ‘within’ effect is productivity growth in activities within the sector whereas the ‘between’ effect measures the change in relative size of sectors taking into account the reallocation of labour between sectors and changes in real output prices. e = estimated as ONS does not publish these values.
[2] Using 2023 published LFS data, it is possible to categorise manufacturing subsectors as high or low value added compared to the sector average.
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
