Productivity down again as firms hire workers instead of investing in machines

Productivity fell through the first half of 2017 in the latest blow to hopes that wages will rise and prosperity take off, as workers’ are producing less output for each hour worked than they were a decade ago.

Rising productivity is a key factor in improving living standards over the long-run, so the fall in output per hour in both of the first two quarters of this year is a gloomy indicator.

Output per hour fell by 0.1pc from the first quarter of the year to the second, and is now 0.3pc below its level at the end of 2007, the Office for National Statistics said.

That means productivity is now 20pc lower than it was expected to be, if the pre-financial crisis rate of growth had been maintained.

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Productivity has flatlined since the financial crisis. Source: ONS

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Index, Q4 2007 = 100Productivity has flatlined since the financial crisisSource: ONSOutput per hourOutput per hour (trend)2002 Q32003 Q22004 Q12004 Q42005 Q32006 Q22007 Q12007 Q42008 Q32009 Q22010 Q12010 Q42011 Q32012 Q22013 Q12013 Q42014 Q32015 Q22016 Q12016 Q48090100110120130Highcharts.com2005 Q2● Output per hour: 95.7

“Given the uncertain economic and political outlook, some businesses may also be trying to meet demand by taking on labour rather than commit to investment. The relatively low cost of labour relative to capital certainly supports employment over investment,” said economist Howard Archer at the EY Item Club.

This means that employment has risen to a record high while unemployment is at a 42-year low, but has been accompanied by weak investment and sluggish pay growth.

He added that a large number of jobs are being created in relatively low skilled, low paid jobs. And there may also be an impact from the so-called zombie companies, those which are inefficient and unproductive but which are kept alive by low interest rates, enabling the problem to persist.

Productivity growth is also weak compared with other countries, and output per hour worked in the UK is now 15.1pc below the average among the other G7 countries.

Analysts at Bank of America Merrill Lynch believe this poor productivity growth will turn into weak long-term economic growth.

“The quid pro quo to the UK’s labour market producing jobs ‘like there is no tomorrow’ is that there has been ‘no tomorrow’ for productivity and real wages. We argued earlier this year that UK trend growth may be 1pc-1.5pc and we stick to that view,” said economist Rob Wood.

He believe this could lead to higher interest rates and less money available for the government to spend. “Weak trend means real wages will not rise at traditional rates after inflation drops back, which will deliver a weak growth outlook,” he said.

“Given the fiscal numbers are based on 2pc trend growth there will be no fiscal easing to help growth anytime soon, in our view. More likely action will be needed to correct the unsustainable long-run deficit outlook.”


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Loknath Das

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