Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday 26 February 2018

UK productivity: too soon to get excited

And why the costs of austerity and Brexit may be bigger than we imagined

UK productivity per hour increased by 0.9% in 2017Q3, and is estimated to have risen by 0.8% in 2017Q4. Numbers like that would not have caused much excitement before the financial crisis, but they sound great compare to what has happened since. However, if you put them in a graph you would quickly put the champagne back in the cellar.

         UK output per hour, % change on a year earlier

As I have suggested before, once you allow for the likelihood that productivity improvements depend on expectations of future demand growth (as you should), this graph is very easy to read. Productivity always falls in a demand led recession (2009) because firms are slow to lay off workers. However once output stops falling (2010,11) firms initially continue to lay off workers and then begin to invest in productivity improvements because they anticipate a recovery, which means we see strong productivity growth.

However the UK economy was hit by two big shocks after the financial crisis. First, the economic recovery failed to happen in 2011 or 2012 because of austerity, so firms stopped investing in productivity improvements. That is why there was no productivity growth in 2012 and 2013. However once the recovery of sorts in 2013 looked like it would be sustained, those productivity improvements began to be made, and we saw positive growth in the second half of 2014 and the first half of 2015. But then the second shock happened: the Conservatives won the 2015 election and the possibility of Brexit meant firms put productivity improvements on hold.

Does the recent growth at least suggest the Brexit shock is over? It is too soon to come to that conclusion. You would expect growing external demand and a tight labour market to encourage productivity growth, so maybe this is the first sign of that. But in the last two quarters it is a fall in hours rather than a fall in employment that is giving the growth, which may suggest the productivity improvement is temporary. It really is too soon to tell. 

If my reading of UK productivity growth is correct, and I’m increasingly convinced it is, then the policy implications are dramatic. The austerity mistake did not just give us a temporary hit to demand and incomes, but has led to permanently lower productivity and therefore permanently lower output and incomes. Brexit started reducing productivity, and therefore output and incomes, before the vote even happened (as I suggested it would back in 2013). The costs of governments or voters ignoring what the majority of economists recommend is even greater than we imagined.


  1. Personally I don't even think that Brexit has really got going in terms of the damage that it will eventually do to the overall UK economy. In several of your articles you have made reference to "fantasy" and that is exactly what we have.
    If you asked the average "Joe in the street" they would support Brexit if they were obviously a leave supporter and state that it was going to be good for the country and vice versa if they were of the remaining camp.
    That is as far as the general ability goes other than they would add that it is got to be good for the country because of course they will say we are going to get immigration down and there will be more money for the national health and that is where the vast majority of leaders are with their understanding. Of course they will add that we are going to get back control and if you asked them toexactly what they mean by that 90% wouldn't be able to answer.
    The damage that leaving the European market is going to do is never properly discussed. What will happen to those industries that depend on that market.?
    What is going to happen to the car industry, aircraft industry, high-tech industry, fashion industry, and any other industry where the majority of components or completed components are manufactured and then exported or re-exported back to Europe no one knows.
    What is becoming clear is that there is a rush tointo a hard Brexit.Indeed no one seems to have any proper opinion other than the economists stating clearly that we will suffer.
    Then there is of course the rush to immediately say "but we are still leaving"!

    It is rather like being in a bad dream that you can't wake up from but the trouble is the bad dream is now rapidly turning into a nightmare and will soon be a horror story.

  2. Would you see part of the low productivity down to the nature of the industries that predominate in UK?

  3. "The costs of governments or voters ignoring what the majority of economists recommend is even greater than we imagined."

    I don't think Simon gets it. The economy flagged not because of Brexit per se but because of uncertainty and negativity whipped by the remainists having impacted expectations.

    Henry Rech

    1. Confidence is one of the MAIN THINGS economics measures, for god's sake! If you're investing, you want to be CONFIDENT in that investment! If brexit was going to "cause negativity", then it was a bad idea in the first place, and victorious brexiteers FAILED to convince markets otherwise!

  4. "The costs of governments or voters ignoring what the majority of economists recommend is even greater than we imagined."

    Since you measure progress by GDP growth, your cost is my benefit. If the UK extracts less, pollutes less, sends fewer ships out killing whales, it is good. GDP is a mindless way of measuring progress. GDP mostly measures the lies of salesmen selling vast oversupply to unwitting marks. Prioritizing output per hour ignores the externalities. Using GDP as a proxy for wealth is ignorant because r > g: world financial capital is ten times the volume of world GDP. Making GDP growth the primary goal of public policy is fetishizing a magical number. Economists should be treated like magical thinkers when it comes to making public policy.

  5. Are you not missing the effect of the second eu ecb recession after the crash and its effect on uk productivity. Plus eu austerity.


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