UK productivity contracted in the second quarter at the fastest pace in five years, highlighting how a trend that has persisted since the global financial crisis has worsened as a result of Brexit uncertainty.
Output per hour worked dropped 0.5 per cent over the three months, compared with the same quarter last year, the worst performance since the April-June period in 2014, the Office for National Statistics reported on Tuesday. The figure suggests that productivity is now declining after it stagnated in the previous two quarters.
Productivity growth is crucial since it is the way living standards improve and countries become richer. In the UK, productivity has stagnated since the 2008 downturn and has failed to recover as it typically does following contractions.
“This sustained period of declining labour productivity represents a continuation of the UK’s ‘productivity puzzle’, with productivity since the economic downturn in 2008 growing more slowly than during the long period prior to downturn,” the ONS said on Tuesday.
Richard Heys, deputy chief economist at the ONS, added that “both manufacturing and services saw a fall on this time last year, with only a couple of other relatively small sectors contributing positively”.
Output has barely grown since the financial crisis, which has limited salary increases that companies can offer their employees, and the economy has underperformed the 36 member countries of the OECD, the Paris-based club of mostly rich nations. The weak performance has worsened since the UK’s 2016 referendum on EU membership.
“Business investment collapsed in the wake of the referendum [and] that will weigh on productivity and wages for a long time to come,” said Paul Johnson, director of the Institute for Fiscal Studies.
Nicholas Bloom, professor of economics at Stanford University, calculated that the Brexit process has reduced the level of UK productivity by between 2 per cent and 5 per cent over the three years since the referendum. A large part of the reduction was because companies are “committing several hours per week of top-management time to Brexit planning”.
Moreover, Brexit-related reduced spending on intangibles such as research and development, software and training, lower levels of multinational investment and lower supplies of skilled foreign workers have had a negative impact on productivity.
