Britain is now suffering its worst decade for productivity – the broadest measure of fundamental economic performance – for as long as two centuries, according to Sky News analysis.
Figures released by the Office for National Statistics (ONS) revealed that productivity – calculated by dividing gross domestic product by the number of hours people worked – is now lower than it was a decade ago.
The ONS said output per hour fell by 0.5% in the first three months of the year. That brought the level down back below where it was at the end of 2007.
According to Sky News analysis based on Bank of England and ONS data, that means Britain’s economy has now experienced its least productive decade for more than two centuries, since the era of George III, when Britain was mired in the Napoleonic wars – and at war with America.
Image: The British burnt down the White House during the War of 1812
The news will be of deep concern for the Treasury, since it regards productivity growth as one of the key bellwethers of Britain’s long-term prosperity.
While overall GDP growth can sometimes go up if the population grows or if people work more hours, productivity detects whether the country is actually earning more for every extra worker and, more forensically, for every extra hour worked.
Britain has consistently lagged behind its continental and G7 counterparts in productivity growth over recent years and today’s ONS data underline that recent slight improvements in productivity have now been reversed.
Video: Productivity problems that hark back to George III
Economists are still debating the root causes of the falls in productivity – which are mirrored in other developed economies, although not to the same extent as in the UK.
While most agree that the financial crisis is a large part of the explanation, few concur on why weak productivity has continued even in the ensuing years.
:: UK productivity slips back below pre-crisis peak
Some say it is down to continuing high levels of debt, others blame disappointing innovation and weak investment, while some suspect economies like Britain need to overhaul regulations in order to boost growth.
Either way, weak productivity is ultimately the root cause for many of the country’s economic problems – including weak household earnings growth and weak tax revenues, which in turn widen the Government’s deficit.
The average 10-yearly growth rate for productivity – GDP per hour worked – was around 23% in the 20th century.
However, even before the financial crisis, the rate dropped gradually, falling from 26% in 2000 to 23% in 2005 to 3.4% by 2015.
By 2016 the decadal growth rate had dropped to 2.3% – the lowest level since 1893.
If one assumes that, after its fall in Q1 2017, productivity remains unchanged for the rest of the year, it will imply the first decade-long fall in productivity since 1794.
Even a major bounce later this year would still leave 10-year productivity growth at the lowest level in more than a century.
Image: 1929 London, investors watch falling prices of shares on New York
In terms of output per worker – an alternative measure – productivity growth (again, on a 10-year basis) is at the lowest level since the 1920s.
Nobel Prize-winning economist Paul Krugman once said: “Productivity isn’t everything, but in the long run it is almost everything.”
With worries about the economy showing little sign of diminishing, Britain is beginning to learn why productivity matters.
Source: SKY News