U.K. Productivity Puzzle Continues With Smallest Rise Since 2016

(Bloomberg) -- U.K. productivity rose at the slowest pace in two years between July and September, disappointing news for policy makers seeking to tackle a decade of stagnation.

Output per hour increased just 0.2 percent compared with the third quarter of 2017, the Office for National Statistics said on Wednesday. While manufacturing saw an increase of 1.7 percent, the dominant services industry achieved only 0.1 percent.

U.K. Productivity Puzzle Continues With Smallest Rise Since 2016

Productivity, which grew around 2 percent a year before the financial crisis, has averaged just 0.3 percent since then -- holding back economic growth and depressing wage packets. Output per hour would be more than a fifth higher had it maintained its pre-2008 trend. Officials see only a modest improvement in coming years.

The figures represent “a continuation of the U.K.’s productivity puzzle,” the ONS said. “This sustained stagnation contrasts with patterns following previous U.K. economic downturns, when productivity initially fell, but subsequently recovered to the previous trend rate of growth.”

To be sure, poor productivity growth has plagued other advanced economies but Britain still lags well behind all of its Group of Seven peers bar Italy, with hourly output barely higher than its pre-crisis peak.

It takes a British worker five days to produce what a French worker makes in less than four. And there are fears that leaving the European Union could see Britain fall further behind by depriving the economy of productivity-enhancing foreign innovation and investment.

U.K. Productivity Puzzle Continues With Smallest Rise Since 2016

Poor productivity means the economy can no longer expand as quickly as it did in the past without fueling inflation. With growth already around the 1.5 percent “speed limit,” in normal circumstances Bank of England policy makers might be preparing raise interest rates again to meet their inflation target. But fears that Britain is heading for a no-deal Brexit are overshadowing everything, and traders put the chance of a rate increase this year at less than 70 percent.

The lackluster productivity performance followed a 1.6 percent jump in the second quarter. Output-per-hour fell 0.4 percent over the quarter, as the number of hours worked rose faster than economic output.

Earnings and other costs outpaced productivity growth, resulting in a 2.8 percent increase in unit labor costs -- up from 2.1 percent between April and June.

The BOE sees unit labor costs growing 2.25 percent in 2019 and 2020, “leading to a gradual building in domestic inflationary pressures” as firms raise prices to protect profit margins.

©2019 Bloomberg L.P.