UK productivity puzzle: Country falls behind the G7

Billy Ehrenberg
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The UK is opening a large productivity gap between itself and the other G7 nations (Source: Getty)

The UK is opening a large productivity gap between itself and the other G7 nations - in the wrong direction.

According to data released by the Office of National Statistics, output per hour in the UK is 17 percentage points below the G7 average, while on a per-worker basis the UK was 19 points behind.

What is more, the trends are going the wrong way: output per hour was less in 2013 than in 2012. No data is available for 2014.

The chart below shows how the per-hour measure compares across the G7 nations:

And here is the data per worker:

It isn't a matter of UK workers not pulling their weight in terms of time in the office. On average, people working in the UK spend more hours working than Germany, yet are less productive.

It is interesting that only Japan is behind the UK on both measures, despite UK workers, on average, putting in more hours than their G7 counterparts. Fourth most hours, second lowest productivity.

Howard Archer, economist at IHS Global Insight, said that the figures were "not hugely encouraging" and said that low productivity could potentially lead to faster rises in interest rates.

If productivity fails to pick up appreciably over the coming quarters, it indicates that the economy has less potential to grow without generating inflationary pressures and that interest rates will likely need to rise at a faster rate than currently envisaged.
The more that productivity improves, the greater the scope of the Bank of England to keep monetary policy very accommodative. The Bank of England is currently assuming that productivity will pick up only gradually.

The data poses a question as to how much of the productibity the UK lost in the crisis is permanent. According to the ONS, the financial downturn has changed the UK's place in the G7 pecking order.

Average annual productivity growth between 1997 and 2007 for the rest of the G7 was lower than in the UK (around 1.8 per cent, compared with 2.3 per cent for the UK), and productivity performance since 2007 has on average been somewhat stronger, implying a productivity gap of around 6 per cent in 2013.
This last chart shows how the UK's trajectory was affected by the crisis:

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