U.K. Productivity Falls as Economy Continues to Lag Behind G7

(Bloomberg) -- Britain, which had the worst performing economy among Group of Seven nations this year, is also substantially lagging it peers when it comes to productivity.

Figures from the Office for National Statistics on Friday showed the U.K.'s labor productivity fell for a second consecutive quarter in the three months through June. Samuel Tombs, an economist at Pantheon in London, said productivity has only grown 0.9 percent in the past decade, the worst performance in two centuries.

The problem has come into sharper focus as the U.K. battles the fallout from last year's Brexit vote. Growth was the slowest among the world's biggest economies in the first half of 2017, while over the long term, productivity on a per-hour basis is more than 15 percent below the G-7 average, the ONS said.

The failure of productivity to recover to its pre-crisis trend has baffled economists for years. Possible explanations include the U.K.'s reliance on services, which lag manufacturing in terms of efficiency growth, “zombie” companies that have been kept alive by loose monetary policy, and limits in the flow of people between firms since the financial crisis.

Output per hour fell 0.1 percent in the three months through June after a 0.5 percent drop in the January-March period, according to the ONS. From a year earlier, work per hour also fell, though output per worker rose slightly. That suggests that employees are only producing more by working longer hours rather than improving their output.

Brexit could further exacerbate the problem, since prolonged uncertainty over the process could lead to a dip in investment, economists say. Reducing trade with the bloc will also likely lead to less gains from innovation.

Slow productivity growth is a fiscal risk for Britain, the Office for Budget Responsibility said in July. Half of the headroom in the public finances could be lost if it fails to improve as forecast in coming years.

The OBR is due to publish an analysis on Tuesday suggesting it has persistently over-estimated productivity over the past seven years, according to a Financial Times report. That means a more pessimistic outlook faces Chancellor of the Exchequer Philip Hammond when he presents the budget in November, with repercussions for government finances.

--With assistance from David Goodman

To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, Andrew Atkinson