Productivity slump raises risk of inflation and higher rates
PRODUCTIVITY slid at the end of last year, dampening hopes of a more sustainable economic recovery and raising the prospect of higher inflation in the months ahead.
Rising productivity is crucial to long-term prosperity, because it is only by producing more value in every hour worked that wages can rise sustainably. However, it has struggled to improve since the financial crisis.
Output per hour worked fell by 0.1pc in the final quarter of 2018 compared with the same period of 2017, the Office for National Statistics said. This was the second consecutive fall.
Public sector productivity fell 0.5pc, while output per hour in manufacturing tumbled 1.1pc. The services industry recorded growth of 0.4pc.
However productivity is up 0.3pc compared with the third quarter, and overall productivity across 2018 was 0.5pc higher compared with 2017.
The poor performance was driven by strong growth in employment combined with weak growth in GDP, indicating that output per hour was barely moving. Economists expect this trend to continue this year.
“It is highly probable that several companies have preferred to take on labour rather than commit to costly investment, given a highly uncertain economic and political outlook, magnified by Brexit since mid-2016,” said Howard Archer, chief economic adviser to the EY Item Club. Business investment fell in every quarter of 2018, undermining productivity further.
“There are a number of other factors that may have hurt productivity. In particular, many of the new jobs that have been created are in less-skilled, low-paid sectors where productivity is limited.”
At the same time, pay is now rising at its fastest rate in a decade as very low unemployment forces companies to offer more money to keep staff and attract new workers.
Paying workers more to produce the same amount of goods and services will put pressure on companies’ margins and profits, pushing them to raise prices, a risk the Bank of England has been alert to. In official terminology, unit labour costs rose by 3.1pc on the year, the 15th consecutive increase and the steepest quarterly rise since 2013.
“Underlying inflation pressure is building – the [Bank’s interest rate-setting] Monetary Policy Committee won’t ignore it,” said Samuel Tombs at Pantheon Macroeconomics.
Meanwhile, MPS on the business select committee have opened an inquiry into investment and growth in all regions of the UK. The productivity figures show only London and the south east of England have productivity above the UK’S average rate. London’s is more than 30pc above the average while Wales’s is more than 16pc below.