UK productivity growth weakest since World War Two

In a report released today, the Office for National Statistics (ONS) revealed that UK productivity, as measured by output per hour, decreased by 0.2% in the third quarter of the financial year. This meant it was little changed on the previous year and slightly lower than in 2007, before the UK’s longest and deepest modern recession.

“These estimates show that the absence of productivity growth in the seven years since 2007 is unprecedented in the post-war period,” the ONS said. The ONS figures show that with workers producing less than they did in 2007, the productivity gap between the UK and its major economic rivals, such as the US, Germany and France, has widened.

The economy is dominating the third day of the general election campaign, and high-level opinions are clashing. On the one hand, 103 business leaders have written to The Telegraph backing the government’s economic policies, which they say show that “the UK is open for business”.

On the other hand, The Guardian cites the poll of 50 leading economists by the Centre for Macroeconomics, asking them whether they agreed that the government’s deficit-reduction strategy had had a positive impact on growth and employment. One third disagreed and a further third strongly disagreed. Only 15% agreed, with none strongly agreeing.

Rise in numbers employed not matched by output

Despite strong employment growth, the increase in the number of people working has not been matched by their hourly output of goods and services. Before the global economic crisis, the efficiency of UK workers tended to increase by around 2% to 2.5% a year. Had that trend continued, productivity would have been 15% higher than it was before the recession.

An alternative measure of productivity, output per worker, showed some growth in 2014 as a result of employees working longer hours. “This still isn’t great – productivity [growth] has still not even returned to its long-run average rate of about 2%, let alone recouped any of the shortfall relative to its pre-crisis trend,” said Vicky Redwood, UK economist at Capital Economics.

The ONS said that despite Britain’s poor productivity, businesses were keeping their costs in check by keeping a lid on their wage bills.

There was better news for the government from the latest snapshot of manufacturing from CIPS/Markit. This showed activity standing at 54.4 points in March, up from 54.1 points in February, its highest level since last August. Any reading above 50 indicates that manufacturing is expanding rather than contracting.

Howard Archer, UK economist at IHS Global Insight, commented: “This is a generally very reassuring survey, which indicates that the manufacturing sector is in decent shape despite latest hard data showing manufacturing output fell back 0.5% in January.”

Main points from the ONS report

  • UK labour productivity as measured by output per hour fell by 0.2% in the fourth quarter of 2014 compared with the previous quarter. In 2014 as a whole, labour productivity was little changed from 2013, and slightly lower than in 2007, prior to the economic downturn.
  • This edition contains revised historical estimates of labour productivity back to 1948, consistent with revisions to National Accounts introduced in Blue Book 2014. These estimates show that the absence of productivity growth in the seven years since 2007 is unprecedented in the post-war period.
  • Despite weak productivity growth, unit labour costs have increased only modestly, by less than 1% per year on average over the last five years. This reflects low growth in labour costs per hour worked.
  • Notwithstanding a fall in manufacturing output per hour in the final quarter of 2014, there was a broad-based and robust recovery in productivity across manufacturing in 2014 as a whole. Productivity also grew in 2014 across the construction industry.
  • Productivity across all service industries grew a little in the final quarter of 2014 and in 2014 as a whole. But productivity performance was more varied between different service industries: output per hour fell in six service industries and rose in five.

You can read the full ONS report here: Labour Productivity, Q4 2014

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