Productivity to rebound at last, says Bank

THE UK is set for a productivity rebound, according to Bank of England economists, despite official data showing a marked slowdown in the first few months of 2018.

The more a worker creates per hour, the stronger a firm’s profits are likely to be, making productivity one of the most important determinants of wage growth and prosperity.

However, this measure fell by 0.4pc from January to March, according to the Office for National Statistics. This was because employment continued to grow, but the overall amount produced did not keep pace.

One of the reasons for a slump in output could have been the Beast from the East snowstorms. However, there has been a long-term “productivity puzzle” in the UK. Growth in workers’ output per hour has fallen since the financial crisis. During many other downturns productivity has declined sharply but soon recovered to the pre-crisis level. This has not been the case in the UK since 2008.

Productivity only grew by 0.9pc compared to the three months to March in 2017. This was less than half the pre-2008 growth rate of 2pc.

Andy Haldane, chief economist at the Bank of England, said last week that productivity was 20pc below the level it would have been, had it continued its pre-crisis trend. Mr Haldane said: “It is a [productivity] gap it is unclear will ever be closed.”

One theory as to why productivity growth has been so low is that cheap labour costs in the wake of the financial crisis made it more tempting for firms to hire staff rather than invest in technology. However, Bank of England economists Will Holman and Tim Pike have said that firms are looking beyond staff to investing in new tools.

A tighter labour market had started to feed into higher wages as firms have competed for staff, making capital investment more attractive.

The recovery in productivity would be “gradual at first”, according to the economists, as investment takes time to feed into business practices.

They added that “the frequency of cases where contacts are looking to address rising costs and poor productivity suggests to us that whole economy productivity growth should soon start to recover”.