The Office for Budget Responsibility (OBR) expects to "significantly" downgrade its forecasts for productivity growth over the next five years after it had been overly optimistic.
In its annual forecast evaluation report, the watchdog said it had predicted in March that productivity growth would rise slowly to reach 1.8 per cent in 2021. Actual productivity growth averaged 2.1 per cent a year in the pre-crisis period, but has averaged just 0.2 per cent over the past five years.
The OBR said unusually low interest rates could be hampering productivity growth by allowing weak and indebted firms, so-called "zombie" companies, to survive. While these firms have helped boost employment, they have also led to lower output per worker.
"The renewed weakness of productivity so far in 2017 may in part be a temporary effect of the Brexit vote and the uncertainty that it has generated. But given the bigger picture – both over time and across countries – it is clear that we will need to revisit our trend productivity growth assumptions again in November," the report said.
"While we continue to believe that there will be some recovery from the very weak productivity performance of recent years, the continued disappointing outturns, together with the likelihood that heightened uncertainty will continue to weigh on investment, means that we anticipate significantly reducing our assumption for potential productivity growth over the next five years in our forthcoming November 2017 EFO [forecast]."