UK productivity warning rings alarm bells

Britain is the only large advanced economy likely to see a decline in productivity growth this year, according to new research, a development the Bank of England governor has blamed on Brexit.

The figures from the Conference Board, a US non-profit research group, highlight the productivity crisis that has struck the UK since the financial crash of 2008-09, with the slowdown worse than in any other comparable country.

Britain is now in its tenth year of feeble labour productivity growth, Bart van Ark, chief economist of the Conference Board, said. “The UK is a consistent story of slow output growth, slow employment growth and slow productivity growth,” he warned. “Not even employment is growing quickly any more.”

When a wider measure of the economy’s efficiency is used, taking account of improved qualifications and capital stock, overall productivity has declined since 2010.

The poor performance of the UK economy, both compared with peers and the past, is ringing alarm bells in the Treasury and BoE.

Speaking on the sidelines of the IMF meetings in Washington last week, Mark Carney, the BoE governor, said that Brexit uncertainty was leaving permanent scars on productivity, the amount of output produced for every hour worked, which economists see as the fundamental building block of prosperity.

“What has happened in the UK in the corporate sector has been a stall in business investment since the referendum,” Mr Carney said. “It is starting to feed through to the productivity statistics”.

“Despite the fact that balance sheets are clean, the economy has no spare capacity, monetary policy is accommodative, the labour market is incredibly tight — everything says invest, invest, invest, but there’s this extreme uncertainty,” he said.

The governor’s concerns chimed with a survey of chief financial officers from Deloitte, the advisory group, also published on Monday, which showed 49 per cent were reducing capital expenditure on the back of Brexit risks.

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Ian Stewart, chief economist at Deloitte, said: “Put mildly, it’s been a turbulent few weeks and there’s been little change in confidence and risk appetite among CFOs, as many priced in a tougher environment at the start of the year.”

“They went into March braced for tough times and the latest round of Brexit uncertainties have not materially changed that picture. When expectations are already low, it’s harder to be disappointed,” he added.

The Conference Board figures show that the UK’s annual growth in output for every hour worked fell from 2.2 per cent between 2000 and 2007 to 0.5 per cent between 2010 and 2017. Last year, productivity growth achieved that figure again but with a buoyant jobs market and weak output growth, it is likely to fall to only 0.2 per cent in 2019.

The average equivalent growth rate in several dozen other mature economies is expected to be 1.1 per cent, the Conference Board said.

Speaking to journalists at the IMF meetings, Philip Hammond, chancellor, said planning for Brexit was impeding the government’s efforts in raising productivity growth. “There is no other way forward. We have to raise our productivity game,” he said.

“We know what the path of a successful UK economy has to be and it would be great to have more time to focus on delivering that rather than having to focus on avoiding a no-deal Brexit.”

The figures from the Conference Board show that “nowhere was the drop in productivity growth rates . . . bigger than in the UK”, While rapid growth in hours worked had offset some of the weakness in productivity between 2010 and 2017, “the growth rate in hours worked has rapidly declined recently”.

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With productivity stalling but wages growing faster, the cost of employing people has risen sharply with unit labour costs growing at their fastest rate since 2013. Often this would be a signal to the BoE that a rise in interest rates was needed to cool demand, but the central bank has indicated that a change in interest rates is unlikely before uncertainties over Brexit fade.



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