UK small business productivity is equalising across regions, but this is largely due to declines in traditionally higher performing regions, according to a new report from global small business platform, Xero. The Xero Small Business Insights (XSBI) special report, Small business productivity: Industry and regional trends, released today, examines the productivity performance of selected industries and regions across the UK, Australia and New Zealand. 

The report, which is based on anonymised and aggregated data from more than 240,000 Xero small business customers across the three countries, builds on an earlier XSBI report and looks at small business labour productivity at the industry and regional level. 

Productivity equalised across UK, at the expense of the strongest regions

‍When comparing the last two years (January 2022 to December 2023) with the period before the pandemic (January 2017 to February 2020), the productivity gap between the UK’s best and worst performing regions has narrowed. This narrowing gap was driven by large productivity declines in the most typically productive regions like London (-2.5%), East of England (-6.5%), West Midlands (-3.3%) and the South East (-5.5%). 

These declines offset improvements in previously lagging regions, such as East Midlands (+9.7%), Yorkshire and the Humber (+7.4%), Wales (+5.1%) and North West (+5.5%) and North East England (+1.0%). The North West and East Midlands are now the second and third most productive regions in the country (averaging £42.80/hour and £42.70/hour respectively in 2023), according to Xero’s data. 

This more equitable productivity outcome is a positive development as it could flow through to more equal wages and living standards across the UK. It would be even better though if this greater equality was accompanied by a lift in overall UK productivity. 

Decline in national productivity in 2023 was broad based 

The decline in national productivity over 2023, identified in Xero’s earlier report Small business productivity: Trends, implications and strategies, was generally experienced in all industries and regions. This underlines the need for governments to think about productivity enhancing policies that have widespread application for small businesses, in any location or industry. 

Alex von Schirmeister, Managing Director, UK & Emerging Markets at Xero, said: “Boosting productivity is crucial for small businesses. It's positive to see some improvements in productivity for small businesses in previously lagging regions, but it's concerning to see traditionally high performing regions like London declining. We need to see productivity gains across all areas and industries of the UK and I hope to see the next government commit to policies that will drive this.” 

In 2023 the most productive industry, construction (£54.30/hour), was around three times better performing than the least, education and training (£19.00/hour). Other industries with strong results include information media and telecommunications (£49.20/hour) and retail (£46.90/hour). The most productive region, London (£47.90/hour), had average productivity that was 53% higher than the least, North East (£31.20/hr). 

The data shows only three industries had higher productivity in the most recent two years, compared to the 2017-2019 period - hospitality (+2.5%, manufacturing (+2.8%), and information media and telecommunications (+7.1%). 

UK hospitality sector outperforms other markets 

In addition to the specific industry and regional insights within countries, the XSBI data also enables some international industry comparisons between each country, by converting currencies to US$*. 

Construction had similar productivity results in Australia, New Zealand and the UK over the period 2017 to 2023. In contrast, hospitality had considerable variation across the three countries. UK hospitality small businesses generally had the highest productivity followed by Australia and then New Zealand, which was much lower. This variation could be due to differences in workforce structure. New Zealand's hospitality workforce has a higher proportion (around 30%) of short-term, temporary migrant workers (such as backpackers and international students) than in Australia (around 15%) and the UK (around 16%). 

Small businesses can take steps to lift 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 

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You can find a copy of Small business productivity: Industry and regional trends here.