Unexpected drop in productivity fuels questions over UK recovery

The latest productivity figures showed a surprise 0.2 per cent fall in the final three months of last year

Manufacturing – one of the few bright spots in the UK’s productivity picture – showed the strongest growth for eight months (Mark Pinder)

Conservative efforts to fight the election on a platform of economic recovery were dealt a blow yesterday as official figures threw fresh light on the UK’s “unprecedented” productivity malaise.

Economic releases will be a political battleground until polling day on 7 May; earlier this week the Conservatives made much of improved growth estimates from the Office for National Statistics. These showed the UK economy expanding at an improved 2.8 per cent rate in 2014.

But the latest productivity figures – measuring output per hour worked – showed a surprise 0.2 per cent fall in the final three months of last year, the first quarterly fall since 2013.

For the year as a whole, productivity barely budged on 2013 and remains below pre-crash levels in 2007. “Such a prolonged period of essentially flat productivity is unprecedented in the post-war era,” the ONS said. Output per worker actually rose 0.3 per cent over the quarter, implying that staff are boosting output by simply working more hours.

The Bank of England has struggled to get to grips with the UK’s productivity puzzle since the financial crisis, with various explanations mooted, such as low levels of investment spending, flexible working practices such as zero-hours contracts and rock-bottom interest rates keeping “zombie” companies afloat. Employment has surged well ahead of growth.

Policymakers have warned that without stronger productivity – allowing companies to produce more at lower costs, improve international competitiveness and afford higher pay for its workers – the UK stands little chance of breaking out of the pattern of anaemic pay growth since the crisis.

The Labour leader Ed Miliband called weak productivity the UK’s “biggest economic challenge” this week, while shadow Business Secretary Chuka Umunna said the latest figures showed the “rise of a low-wage, low-skilled economy and insecure work as productivity has stagnated”.

Low productivity will also have a bearing on when the Bank of England raises rates, because if more workers are needed to produce goods, economic slack will be eroded more quickly, potentially feeding into higher wage demands and inflation. The Bank hopes productivity growth will pick up to 0.75 per cent this year and 1.5 percent in 2016, close to its long-run average of 2 per cent.

IHS Global Insight economist Howard Archer said: “How productivity develops going forward will be a critical factor in how soon and how far the Bank of England raises interest rates. If productivity has taken a significant lasting hit, it means the economy has less potential to grow without generating inflationary pressures, and interest rates will need to rise earlier.”

Manufacturing – one of the few bright spots in the UK’s productivity picture – had better news yesterday, as an upbeat survey from the Chartered Institute of Procurement & Supply showed the strongest growth for eight months. The activity index – where a score over 50 signals growth – ticked higher to 54.4 last month, from 54 in February.

But data showed manufacturers focused on consumer goods are enjoying by far the biggest rise in orders, as shoppers buoyed by low petrol and food prices spend spare cash. Firms producing investment goods or machinery parts saw far more subdued growth.

Rob Dobson, senior economist at survey compiler Markit, said: “Scratching beneath the surface of the numbers, we can see that the drivers of growth are heavily skewed towards domestic consumers.”