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UK productivity puzzle continues with smallest rise since 2016

London

UK productivity rose at the slowest pace in two years between July and September, disappointing news for policy makers seeking to tackle a decade of stagnation.

Output per hour increased just 0.2 per cent compared with the third quarter of 2017, the Office for National Statistics (ONS) said on Wednesday.

While manufacturing saw an increase of 1.7 per cent, the dominant services industry achieved only 0.1 per cent.

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Productivity has grown by just 0.3 per cent a year since 2008 compared with a pre-recession average of around 2 per cent, holding back economic growth and depressing wage packets.

Output per hour would be more than a fifth higher than it is had it maintained the trend seen before the financial crisis. Officials are expecting only a modest improvement in coming years.

The figures represent "a continuation of the UK's productivity puzzle", the ONS said.

"This sustained stagnation contrasts with patterns following previous UK economic downturns, when productivity initially fell, but subsequently recovered to the previous trend rate of growth."

To be sure, poor productivity has plagued other advanced economies but Britain still lags well behind its Group of Seven peers.

It takes a British worker five days to produce what a French worker makes in less than four. And there are fears that leaving the European Union could see Britain fall further behind by depriving the economy of productivity-enhancing foreign innovation and investment.

Poor productivity means the economy can no longer expand as quickly as it did in the past without fuelling inflation.

With growth already around the 1.5 per cent "speed limit", in normal circumstances Bank of England (BOE) policy makers might be preparing to raise interest rates again to meet their inflation target.

But fears that Britain is heading for a no-deal Brexit are overshadowing everything, and traders put the chance of a rate increase this year at less than 70 per cent.

The lacklustre productivity performance followed a 1.6 per cent jump in the second quarter.

Output-per-hour fell 0.4 per cent over the quarter, as the number of hours worked rose faster than economic output.

Earnings and other costs outpaced productivity growth, resulting in a 2.8 per cent increase in unit labour costs - up from 2.1 per cent between April and June.

The BOE sees unit labour costs growing 2.25 per cent in 2019 and 2020, "leading to a gradual building in domestic inflationary pressures" as firms raise prices to protect profit margins. BLOOMBERG