Friday 6 January 2017 9:57 am

Productivity puzzle remains for economists despite UK growth in third quarter of 2016

The UK is still struggling to increase the amount it increases per worker as economists wrestle with a continued “productivity puzzle”, new official data shows.

Labour productivity, measured by the amount the UK produced per hour, grew by only 0.4 per cent in the third quarter of 2016, representing a flat rate of growth, according to the Office for National Statistics (ONS).

The manufacturing sector continues to struggle for productivity, despite growing levels of economic activity. Manufacturing productivity fell by 0.2 per cent in the third quarter of 2016.

Read more: Hurrah: The UK boosted its productivity potential last year

However, productivity in the massive services sector – almost 80 per cent of the UK economy – grew by 0.3 per cent. Services account for the lion’s share of productivity growth since the financial crisis – although financial services have actually had a negative impact on the measure.

Productivity growth remains below levels seen before the financial crisis, which the ONS describes as the “productivity puzzle”.

Richard Heys, deputy chief economist at the ONS, said: ”These estimates of productivity show that while labour productivity is improving, particularly in the services sector, it is still weak compared to that experienced in the recent past, both in terms of the level of productivity and the rate of growth.”

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While GDP has grown steadily since 2008 productivity – measuring the amount of output produced per worker – has been not recovered to pre-trend levels.

Britain – along with much of the developed world – has struggled to boost productivity, with output per hour only rising above pre-financial crisis levels for the first time in the third quarter of 2016. It now stands 1.1 per cent higher than the first quarter of 2008, when the economic downturn began to hit.

Central bankers throughout the world have been urging governments around the world to up their efforts to boost productivity. Yesterday Andy Haldane, chief economist at the Bank of England, warned that the lack of productivity was a "fundamental" problem for the UK economy.

He warned of a "fat tail" of businesses in the UK which are not catching up with "frontier companies" in boosting productivity, and backed government efforts to use an industrial strategy to boost the UK economy.

Read more: The OBR fears UK economic productivity could be weaker after Brexit

Chancellor Philip Hammond announced a new £23bn productivity investment fund in the Autumn Statement in November, but independent forecasters have said the money will not result in a meaningful increase in national output.

It could also be harmed by the effects of Brexit, according to a new report by KPMG. Although the accountancy firm said the UK has increased its "productivity potential" – based on its strong institutions and foreign investment – the process of leaving the EU could harm productivity if it reduces knowledge exchange with other nations.

Howard Archer, chief UK and Europe economist at IHS Markit, said: "A major risk is that prolonged uncertainty and concerns over the UK’s economic outlook ends up weighing down markedly on business investment and damages productivity.

"This could be compounded if foreign companies markedly reduce their investment in the UK and this dilutes any beneficial spill-over of skills and knowledge," he added.