economy

UK productivity falls as economy continues to lag behind G7

Output per hour fell 0.1% in the three months through June

Bloomberg
15:20 October 6, 2017

LONDON

Britain’s labour productivity fell for a second consecutive quarter, adding to the puzzle facing economists and leaving the UK trailing other advanced economies.

Output per hour fell 0.1 per cent in the three months through June after a 0.5 per cent drop in the January-March period, the Office for National Statistics said Friday. From a year earlier, per hour work also fell, though output per worker rose slightly. That signals that employees are only producing more by working longer hours rather than improving their output.

Over the long term, productivity has been lower on average than before the financial crisis, the ONS said. And on a per hour basis, the UK is more than 15 per cent below the Group of Seven average. Samuel Tombs, an economist at Pantheon in London, said productivity has only grown 0.9 per cent in the past decade, the worst performance in two centuries.

The failure of productivity to recover to its pre-crisis trend has baffled economists for years. Possible explanations include the U.K.’s reliance on services, which lag manufacturing in terms of efficiency growth, “zombie” companies that have been kept alive by loose monetary policy, and limits in the flow of people between firms since the financial crisis.

“UK companies in receipt of investment from abroad were significantly more productive than those that were not in 2015, even after controlling for firm size, industry and region,” the statistics office said. “However, this may be a reflection that international investment tends to flow into the most successful businesses.”

Brexit could further exacerbate the problem, since prolonged uncertainty over the process could lead to a dip in investment, economists say. Reducing trade with the bloc will also likely lead to less gains from innovation.

In an assessment of the fiscal risks facing Britain, the Office for Budget Responsibility in July identified productivity, saying that half of the headroom in the public finances could be lost if it fails to improve as forecast in coming years.

The OBR is due to publish an analysis on Tuesday suggesting it has persistently over-estimated productivity over the past seven years, according to a Financial Times report. That means a more pessimistic outlook faces Chancellor of the Exchequer Philip Hammond when he presents the budget in November, with repercussions for government finances.