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UK productivity grows at quickest pace in six years

by International Commercial Investment on January 8, 2018

Source: Financial Times

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The hourly productivity of British workers jumped at the fastest rate for six years during the third quarter of 2017, raising hopes for a turnround in one of the UK economy’s most persistent weaknesses.

Output per hour increased by 0.9 per cent compared to the previous quarter — the biggest increase since the second quarter of 2011, when productivity grew by 1 per cent, according to the Office for National Statistics.

But the figures released on Friday also showed that growth in UK workers’ productivity over the past decade was the worst since the 1820s and the level of output remains only barely above where it was before the financial crisis.

Britain has experienced a “lost decade” of productivity growth, the main driver of long term economic growth and higher living standards, since the 2008 crisis; the recovery in economic growth has been slower than expected while unemployment has fallen to levels not seen since the mid-1970s.

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Chancellor Philip Hammond welcomed the latest figures. “We’re investing in skills, housing and transport to improve productivity, which is vital for raising wages and making our economy fit for the future,” he wrote on Twitter.

The most recent growth in productivity was due to the number of hours worked falling rather than an acceleration in the growth of output. The data suggest that the UK’s jobs boom lost momentum during the quarter.

But economists will take heart from evidence that the slowdown in employment growth was not accompanied by a dramatic slowdown in the rate of overall economic growth. The UK economy grew by 0.4 per cent during the quarter, up slightly from the 0.3 per cent quarterly growth during the second quarter.

Howard Archer, chief economic adviser to the EY Item club, said the rise in productivity during the quarter was likely to continue in the final three months of 2017 but it needed to be seen in the context of a poor first half.

“There needs to be sustained improvement to ease concerns over the UK’s overall poor productivity record since the deep 2008-09 recession,” he said.

While many advanced economies have seen a drop in productivity growth, the UK has seen a particularly dramatic fall. The lack of a sustained increase in productivity has become one of the central problems for its economy, blamed for disappointing wage growth and the government’s struggle to close its deficit.

Mr Hammond made improving productivity the centrepiece of its November budget when he launched a £23bn national productivity fund. However economists said the scale of the investment was nowhere near enough to tackle Britain’s longstanding problems.

The Office for Budget Responsibility, the government’s fiscal watchdog, lowered its forecast for future productivity growth in November. It now predicts that the underlying productivity of the UK economy will only increase by 1.5 per cent a year, compared to more than 2 per cent before the 2008 financial crisis.

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A breakdown by sector, published alongside the ONS figures, showed that financial services and non-manufacturing production, a category that includes utilities and the UK’s North Sea oilfields, have reduced Britain’s overall productivity growth since the crisis.

Other sectors of the economy contributed to productivity growth but not at the same rates as they did before the crisis. Productivity in non-financial services contributed just 4 percentage points over the past nine years.

Economists and commentators have fiercely debated why productivity growth has fallen over the past decade. Theories include low levels of investment, mis-measurement and the low cost of labour allowing companies to hold on to unproductive workers.

International Commercial InvestmentUK productivity grows at quickest pace in six years