UK productivity weakness worsening, says ONS

Britain's workers became less productive in the final quarter of 2014, highlighting a significant weakness that has dogged the UK economy for eight years.

After a hat trick of good economic news this week from upward revisions to growth, higher living standards and improved consumer confidence, official figures published on Wednesday will dent the confidence of the Conservative party in the crucial economic battle for votes.

The lack of productivity growth has been the Achilles heel of the UK economy since 2007 and without a turnround, living standards will not improve.

Despite attempts at labour market deregulation and a rapid recovery since 2013, George Osborne, the chancellor, has not been able to make productivity rise again.

The Office for National Statistics reported that output per hour worked fell 0.2 per cent in the fourth quarter of the year and was little changed on average in 2014 compared with 2013.

Output per worker rose 0.3 per cent in the same quarter, indicating they were increasing the number of hours they worked.

Since 2007, there has been a huge shift in the economy from growth in output underpinned by improved efficiency of the workforce towards all additional growth coming from more workers employed for longer hours.

"The absence of productivity growth in the seven years since 2007 is unprecedented in the postwar period," the ONS said.

Economists have debated the cause of stalled productivity growth extensively but with little consensus, save for agreement that it is partly related to especially weak output in the oil industry and in financial services.

Michael Saunders of Citi said: "Weakness in productivity reflects the combination of surprisingly strong job growth at a time when growth has been modest."

Missing stalled productivity growth has been the main forecasting error of the Office for Budget Responsibility and the Bank of England over the past five years, with both underestimating the growth of employment while simultaneously being too optimistic about output growth.

Vicky Redwood of Capital Economics noted: "Productivity has still not even returned to its long-run average growth rate of about 2 per cent, let alone recouped any of the shortfall relative to its pre-crisis trend."

The big test for the next government will be whether productivity will start to rise steadily if unemployment keeps falling.

Mr Saunders said: "It would be worrying in our view if aggregate productivity growth remains weak even once the economy has returned to full employment."

If workers fail to improve their output, the OBR has estimated that all the political parties' plans for the public finances and the end of austerity are far too optimistic because it will be a struggle to reduce the deficit without further tax increases or deep spending cuts.

The figures also showed that weak productivity is not yet causing inflationary pressure. The rise in the cost of wages for every unit of output was held back at 0.5 per cent in 2014, similar to its growth rate over the past five years.

The weakness in unit wage costs suggests that even if pay growth picks up without productivity, there is little threat yet to the 2 per cent inflation target.

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