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UK labour productivity ‘rose just 0.5% in 2018’

Apr 12
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Labour productivity in the UK rose just 0.5% in 2018, significantly below the 2% average growth rate seen before the 2008/9 downturn, the Office for National Statistics (ONS) has reported. 

Howard Archer, chief economic advisor to the EY ITEM Club, described the figures as “disappointing news” and warned that the UK’s weak performance reinforces concerns about the UK’s overall poor productivity level since the recession. 

He explained that productivity levels were only able to rise modestly in the fourth quarter of 2018 after a relapse in the third quarter, thereby completing an overall weak performance in 2018 with erratic movements from quarter to quarter. 

Compounding this, the UK seems set for another poor productivity performance in the first quarter of 2019, with GDP growth anticipated to be in the 0.2-0.3% quarter-on-quarter range, while employment shot up by 222,000 in the three months to January. 

Mr Archer explained that the erratic productivity performance seen particularly over 2018’s first three quarters can be explained by specific factors that impact growth. 

“Gross value added was limited to just 0.1% quarter-on-quarter in the first quarter as extreme cold weather affected the economy. Growth picked up to 0.4% quarter-on-quarter in the second quarter and 0.7% quarter-on-quarter in the third quarter as there was some catching-up of the activity lost in the first quarter while the hot summer weather and football World Cup in June/July supported activity,” he said. 

He also highlighted the fact that employment could have been lifted recently due to UK companies being keen to onboard workers and retain current employees given widespread concerns over sector-specific labour shortages and reports of fewer EU workers coming to the UK since the 2016 Brexit referendum. 
“It is also probable that many companies took on labour rather than committing to costly investment, given the highly uncertain economic and political outlook. The low cost of labour relative to capital has certainly supported employment over investment,” he added. 
Mr Archer also noted that a number of structural issues could have harmed productivity over the past 12 months. He pointed to the fact that many of the new jobs created have been in less-skilled, low-paid sectors where productivity is limited. Additionally, issues stemming from the economy are likely to have caused under-investment and an inefficient allocation of resources. 
According the expert, heightened concerns over Brexit are likely to have caused some companies to limit their investments, with damaging results. 

“If a Brexit transition deal is agreed and enacted during the second quarter, this should hopefully ease business uncertainty and provide some boost to business investment which would be good news for productivity prospects,” he said.  

“Even so, ongoing uncertainties over the future trade relationship between the UK and EU may well limit the upside for business investment.”

However, he warned that a prolonged Brexit delay would likely extend business uncertainty and continue to weigh down investment. This would in turn impact on productivity levels. This could be particularly severe if Britain leaves the EU without a deal.

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