Wage increases under threat as slowdown in UK manufacturing weighs on productivity growth

Jasper Jolly
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The New State Of The Art Ford Production Line
Manufacturing sector output declined after growing in the previous quarter (Source: Getty)

UK productivity growth fell two-thirds between July and October, despite better than expected GDP growth, new figures have shown.

Data from the Office for National Statistics (ONS) showed the main measure of productivity, growth in average output per hour worked, declined to 0.2 per cent from July to September, down from 0.6 per cent in the second quarter.

The fall in productivity growth could delay wage increases further if stagnant output per hour does not justify higher pay.

Growth in output was driven mainly by the services sector, which accounts for almost 80 per cent of the UK economy. Third-quarter growth for services reached 0.8 per cent.

Manufacturing sector output fell by one per cent in the third quarter, after a previous-quarter increase of 1.6 per cent.

Graph showing GDP falling against total employment and hours worked post-crisis
UK productivity did not reach pre-crisis levels until 2016

Analysts were split as to whether the slowdown in productivity growth would benefit wages.

“The capacity of employers to pay more will not be supported by continued weak productivity growth. Overall, prospects of the labour market taking a turn for the worse in the not-too distant future are looking more likely,” said Martin Beck, senior economic adviser to the EY Item Club.

However, Geraint Johnes, director of research at Lancaster University’s Work Foundation, said productivity measures are “sustaining their recent gains, and this is likely to underpin more favourable wage settlements".

"Whether real wage gains can be sustained as prices rise following the depreciation of the currency remains to be seen,” he added

Productivity remains above the highest level reached before the financial crisis in 2008. It took eight years for it to regain its pre-crisis level, as a relatively strong labour market outpaced GDP growth.

Employment and GDP both took a heavy hit during the crisis, but the former increased at a faster rate. As a result, the average output by workers per hour decreased.

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