UK productivity fell in the first three months of 2019, the third consecutive quarter of decline, according to official data published on Friday that highlighted a central weakness in the economy since the financial crisis.
Output per hour worked fell 0.2 per cent in the first quarter compared with the same period last year. British workers toiled for longer without any corresponding increase in their production of goods and services.
Katherine Kent, head of productivity at the Office for National Statistics, the UK statistical agency, said: “Our latest figures represent a continuation of the UK’s productivity puzzle. This sustained stagnation in productivity in the last decade is at odds with what we’ve seen after previous economic downturns.”
Since the financial crisis, productivity has largely stagnated. This contrasts with previous downturns, when productivity initially fell, but then recovered to its previous rate of growth.
“Labour market productivity is now almost 30 per cent below the pre-crisis trend,” said Jack Leslie, analyst at the Resolution Foundation, a think-tank. “This dismal record has been the single biggest driver of the stagnation in living standards over the last decade.”
Over the past decade, many companies have preferred to hire workers rather than invest in their businesses, in moves that have exacerbated poor productivity growth. The uncertainty over Brexit has contributed to weak business investment.
“It is apparent that many companies have preferred to take on labour rather than commit to costly investment, given a highly uncertain economic and political outlook, magnified by Brexit since mid-2016,” said Howard Archer, chief economic adviser at EY Item Club, a consultancy.
The decline in productivity in the first quarter was driven by the manufacturing sector, where output per hour worked fell 0.9 per cent compared with the same period last year. Productivity in the services sector increased by 0.2 per cent.
“With political risks clouding business decisions, firms have lacked the confidence to invest in the equipment and technology that drive efficiency gains in their organisations,” said Tej Parikh, economist at the Institute of Directors, a business lobby organisation. “Even if the clouds of uncertainty do lift later this year, it will be a while before pent-up investment activity filters through to the productivity numbers.”
The UK is the only major advanced economy that is expected to record slowing productivity growth this year, according to data published in April by the Conference Board, a think-tank.
Output per hour worked is predicted to grow by 0.2 per cent this year, down 0.3 percentage points from 2018. By contrast, productivity growth is expected to accelerate 0.3 percentage points to 1.3 per cent in the US, with similar gains in France, Germany and Canada.
A recovery in UK productivity growth is also in doubt for next year. Dave Ramsden, deputy governor of the Bank of England, predicted that in 2020 economic growth could be slower than forecast in the central bank’s latest inflation report because of “more downside risks to productivity”.
He said he was “less optimistic that investment will recover as much as it does in the [BoE’s] central forecast”.
Overall, the near-term trend in productivity is largely linked to the Brexit negotiations, according to the BoE. “The outlook for productivity growth is likely to be sensitive to the nature of the UK’s future trading relationship with the EU,” it said.
