UK productivity jumps at fastest rate for six years

The productivity of British workers has increased at the fastest rate in more than six years, handing the government a rare boost in correcting one of the biggest problems facing the UK economy.

Labour productivity, or economic output per hour worked, grew by 0.9% in the three months to September 2017, the Office for National Statistics said. Economists said the jump came thanks to stronger growth in factory output, weaker jobs growth and the UK economy generating broadly the same amount of output for fewer hours worked.

Philip Shaw, chief economist at City bank Investec, said falling numbers of people entering the workforce and fewer hours worked were also key reasons for the gains. When fewer people work fewer hours but economic output holds steady, efficiency levels naturally rise, he said.

“I’d take one quarter’s numbers with a pinch of salt. It’s not at all bad news but difficult to embrace as a big change just yet in what is a disappointing history since crisis,” he added.

Nonetheless, the third quarter increase was the largest seen since the second quarter of 2011. But while the growth rate was in line with the overall rate for 2017 estimated by the Office for Budget Responsibility, the government’s official economic forecaster, the reading is still well below the pre-financial crisis trend rate for the UK of about 2% a year.

Sluggish growth in the efficiency of workers in Britain, held back in part since the financial crisis by the creation of low-skilled jobs, was one of the main reasons for the sharp downgrade in economic growth unveiled by the chancellor at the budget in the autumn. It has also been a key factor in holding down wages across the economy.

Compounded by fears over further potential weakness from Brexit, ministers have placed boosting productivity among their top priorities, with additional investments in technology, infrastructure and training as part of the government’s industrial strategy.

The increase in productivity was fuelled by improved efficiency in the services sector, which is Britain’s dominant industry, and has typically been a laggard in terms of boosting economic output per hour worked. There was also an increase in manufacturing output in the third quarter, as the UK’s factories benefit from an upswing in global economic growth and the weak pound buoying demand for British goods among foreign buyers.

Gross domestic product grew by 0.4% in the three months to September – a similar rate to previous months – while the number of hours worked fell by 0.5%. Howard Archer, chief economic adviser to the EY Item Club, said it looked like there had been further growth in productivity in the final three months of 2017.

“The rebound in productivity in the third quarter is highly welcome, but it needs to be seen in the context of a particularly poor first half performance,” he said.

Previous UK economic downturns have typically seen productivity fall, before subsequently bouncing back to the previous trend rate of growth. This has not been the case in the years since the 2008 financial crisis, amid rising employment, particularly from low-skilled and low-paid jobs.

The Office for National Statistics said productivity in the third quarter was 16.6% below its pre-downturn trend, and would have been 19.8% higher had it bounced back to its previous growth rate.

Should Britain’s productivity levels show further signs of progress, it will be likely to spark a robust debate about how the gains from that progress are shared. Trade unions have warned the greater use of technology in the workforce, which stands to boost efficiency, should not come at the expense of employment and growth in workers’ pay.

The UK is forecast to have the lowest pay growth in the OECD for 2018, as sluggish salary increases fail to keep pace with rising inflation.

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