Productivity in the UK recorded a year of consecutive improvements for the first time in more than five years, despite slowing slightly in the final three months of 2016.
Output per hour grew by 0.3 per cent in the three months to December, according to preliminary estimates by the Office for National Statistics (ONS), a slowdown from the 0.4 per cent growth recorded in the previous quarter.
While the UK economy grew faster than was previously expected, the number of hours worked also rose, weighing on total productivity.
The dominant services sector contributed more to third-quarter productivity growth than other parts of the UK economy.
The government has placed increasing productivity at the heart of its economic plans, with chancellor Philip Hammond announcing a £23bn national productivity investment fund in the Autumn Statement.
Economists’ opinions vary as to the degree to which the fund will be able to boost GDP growth, with the independent Office for Budget Responsibility sceptical the chancellor’s plans will add to growth.
However, the Bank of England attributed a significant chunk of their dramatic upgrade to UK growth prospects to the government’s plans.
Chris Hare, an economist at Investec, said: “Strong GDP in the face of soft employment and wages at the end of last year is a tentative sign that the UK economy is capable of expanding through improvements in productivity.”
Productivity growth is intimately connected with wage growth. If output per hour rises businesses should be able to pay their staff more, while a higher-skilled workforce is generally better paid. Technological improvements can also boost productivity.
However, the continued weak pace of productivity growth, well below pre-financial crisis averages, means growth in earnings has been sluggish.
Rachel Smith, principal labour market economist at the Confederation of British Industry (CBI), said: “There are tentative signs that productivity is picking up, but there is further to go before it can underpin faster wage growth.”
UK productivity has lagged other countries, with knock-on effects on workers’ living standards in comparison to similar developed nations.
Steve Hill, external engagement director at The Open University said: "The widening gap between us and other countries shows how we are lagging behind – and means that many UK workers are expected to work longer hours for lower pay than in Europe.