Productivity in small businesses still below pre-pandemic levels

A new report out today reveals that small business labour productivity remains below pre-pandemic levels in the UK, putting pressure on already struggling small businesses. The report by Xero – Small business productivity: Trends, implications and strategies –  which is based on anonymised and aggregated data from more than 240,000 Xero small business customers, looks at small business labour productivity in the UK, Australia, and New Zealand.

It identified that productivity is below pre-pandemic levels for all three countries, but the UK is lagging further behind Australia and New Zealand – with the productivity gap between both countries and the UK widening even further since the UK left the European Union.

Small business labour productivity is currently below its pre-pandemic average. Temporary business closures and disruptions saw productivity plunge from around £41/hour, for the three year period prior to the pandemic, to as low as £36.20/hour in July 2020. As pandemic disruptions eased, productivity began to rebuild, reaching its most recent peak in August 2022 at £41.80/hour. But over 2023 productivity fell again to be just £38.80/hour at the most recent reading in December 2023. This is likely putting pressure on small business profits, making it harder for them to lift wages for staff and keep prices low for customers.

Alex von Schirmeister, Managing Director UK and Emerging Markets at Xero said: “Labour productivity has been a big issue in the UK for a long time. Without driving digital adoption across all businesses, we have little hope of increasing our productivity. Working smarter is the key to unleashing business potential, especially for small businesses. Think of the difference between a tradesperson who has the digital tools to quote and invoice on the go, versus waiting until they get home. Small steps can make a big difference to our economy, so it’s essential we boost digitalisation to drive productivity amongst small businesses.”

Small business productivity keeping up with larger business

Another key finding from the report is that small business productivity growth in the UK, as measured by the XSBI data, is often higher than productivity growth across all businesses. This is unexpected as, generally, small business productivity performance is lower than national productivity growth. A likely reason for this difference is that the small businesses in the XSBI data set are all Xero customers and therefore using digital technology, which is known to improve productivity. This points to a positive link between digitalisation and productivity.

Uncertainty impacting on productivity

Heightened uncertainty in recent years, including Brexit, may have had a negative impact on small business labour productivity, according to the XSBI data.

Comparing the gap in productivity between the UK, Australia, and New Zealand highlights that after the UK left the European Union in January 2021, the productivity gap between the countries widened. UK productivity outcomes fell behind New Zealand by 13.6 percentage points between January 2021 – December 2023, and behind Australia by 11.1 percentage points. This is a wider gap compared with the Brexit negotiation period (January 2017 – January 2020).

How small businesses can boost productivity

For tips on how small businesses can lift their own productivity, Xero has put together a guide. This includes four key areas for a small business and their advisors to think about:

  • Buying better work tools (or capital) to amplify the efforts of workers
  • Developing smarter processes or methods of working
  • Upskilling workers
  • Using entrepreneurship skills to not just start a business but also make sure it is operating at its full potential

This new XSBI productivity data supports conversations on productivity due to its sole focus on small businesses, speed to market and monthly measurement cadence, and objective, anonymised, aggregated data. Other productivity data is generally broader, slower to be released and covers a longer period of time (e.g. quarterly or annual). You can find a copy of the report here.