The source of the gloom is UK’S woeful productivity

The British economy is entering one of its worst-performing periods since the Second World War, according to the Government’s latest official forecasts. The Office for Budget Responsibility published figures yesterday showing that GDP growth is expected to remain under 2 per cent for all of the next five years – the first time that the Government has made such a prediction since at least 1983.

These are dire figures and they are driven primarily by one thing: weak productivity. Productivity is a measure of how much economic output British workers create for every hour they work. Productivity usually goes up when workers are more highly trained and use better equipment – in simple terms, a worker using an internetconnected computer can produce more each hour than someone relying on a typewriter and a library.

In turn, productivity growth boosts wages and GDP. The more each person produces, the more businesses can afford to pay their workers. Before the financial crisis, the UK’S productivity rose, on average, by about 2 per cent each year. But since 2008, that growth has more than halved.

For years, over the course of 16 budgets and autumn statements, the OBR has been assuming that this is a temporary phenomenon and will bounce back in due course. Yesterday, it gave up on that idea, admitting that unexpectedly low productivity “has been a consistent feature of our forecasts for some time” and deciding that it should now treat this slowdown as permanent.

Productivity growth is the biggest single driver of GDP growth and prosperity, so the effect of this revision for households is bleak. It knocks 3 per cent off the OBR’S 2022 GDP forecast and means that earnings will be outstripped by inflation for the next few years and then rise only marginally above prices.

For the Government, this is also terrible news. Low productivity and wage growth deliver a double hit to the public finances, both eroding the tax take and increasing the reliance of poor households on welfare and tax credits. Foreign aid hawks might be pleased that this reduces the amount we will spend on development by £375 million, but it’s a symptom of economic malaise. Voters whose wages are in long term stagnation don’t tend to look kindly on incumbent governments.

The only bright spot in all of this is that Britain is still very good at creating jobs. The economy generated 230,000 in the last three quarters – double what the OBR expected. This is the flip side of low productivity.

Instead of investing in training and equipment, so that each employee can produce more, companies are hiring more and cheaper workers. This creates lots of jobs, but it means that workers are forced to put in longer hours to make ends meet.

Britain is not alone in experiencing poor productivity growth over recent

years, but the UK’S performance is exceptionally bad, even compared with other advanced economies. This trend was visible long before the Brexit referendum, although the OBR does not expect the extended economic uncertainty to help.

Before sinking into depression over these awful figures, however, it’s worth sounding a note of caution. There has been just one consistent feature of the OBR’S and other economic forecasts in recent years: they are always wrong.

We still don’t quite know why productivity growth has been so bad. Part of it might be due to how we measure it. The UK is heavily reliant on services, where we are less good at measuring GDP output. Figures for more productive economies, like France, are also flattered by the fact their lowest skilled workers simply cannot get jobs.

None of these questions over the data can fully explain the UK’S particularly poor performance. But economists haven’t yet hit upon a compelling explanation. After years of getting it wrong, the OBR has finally decided to play it safe and bend to reality.

There are plenty of reasons to be worried about the UK’S long term economic performance. But, on the bright side, whatever official forecasters tell us about the future, one thing is almost certain: they will get it wrong.