If the official data can be believed, it is time to panic about the UK economy’s efficiency. Britain’s long-standing productivity puzzle is turning into a crisis and the result will be feeble improvements in living standards, weak public finances and discontent in the country’s governance.
Growth in output per hour worked fell after the global financial crisis, rising only 0.7 per cent a year instead of the pre-2008 2 per cent rate. The most recent data shows labour productivity decisively below this meagre trend.
The proximate causes of the original “productivity puzzle” are now reasonably well understood. While improvements in efficiency deteriorated across broad areas of the economy, the prime driver in the declining growth rate was that Britain’s best sectors, best companies and best regions had lost much of their pre-2008 momentum. Advanced manufacturing, professional services, finance and London’s economy were no longer pulling away from the rest of the UK.
The fashionable political answer in the late 2010s to the faltering top tail of the productivity distribution was to address something entirely different and seek to “level up” the country. No one should be surprised that it failed.
The most recent data is alarming. Productivity levels have been falling since 2023 and the growth rate has dropped below the post-2008 trend.
The underlying drivers of the current crisis are different. The Office for National Statistics has found a “batting average” effect where more people are now employed in low-productivity sectors. This drags down overall rates, reflecting both the growing need for elderly care and a temporary recent surge in lower-skilled migration. The public sector has also seen large drops in its measured productivity since Covid.
There has been a general malaise affecting most sectors of the economy. The Competition and Markets Authority puts this down to a fall in business dynamism, evidenced by fewer people moving jobs, company start-ups and closures declining and fewer young companies displacing more established players in their sectors.
Regardless of the government’s welcome drive for growth, this evidence should persuade the Office for Budget Responsibility to mark down the economy’s prospective potential growth rate. Recent data is so bad it is dangerous to assume things will just turn around as the fiscal watchdog thinks. Its October forecasts have already been confounded by the latest data.
I started this column saying “if you believe the data” it is time to panic. Sadly, you cannot believe the data, especially the productivity figures at the moment. Data for output, employment and hours worked are all compromised.
The ONS itself recognises that its most recent figures do not reflect the latest population projections and when the new data with higher migration is incorporated, the productivity trends will look even worse. Going in the other direction, the NHS this month published much more encouraging health-sector efficiency data than the official figures, suggesting public-sector output is likely to be revised significantly higher. The hours data in all measures comes from the discredited labour force survey and its replacement will be based on a different concept entirely. The Bank of England has found the latest trends impossible to explain.
With such uncertainty, it would be rash for the OBR to transform its potential output forecasts in the update due on March 26, requiring big spending cuts or tax increases from the government. But it should put ministers on notice that it is minded to downgrade the productivity outlook once the data can give more clarity and if they show the same trends.
That is still likely to be difficult news for the nation. Without much faster productivity growth, households, companies and spending ministers will be disappointed with the UK’s economic performance.
chris.giles@ft.com