Productivity in the UK fell back to below the level it was at in 2007 in the first quarter of 2017, confirming a “lost decade” with no increase in how much is produced during an hour of work. The Office for National Statistics said output per hour had fallen by 0.5 per cent in the first quarter, the first quarterly fall since the end of 2015.
“UK labour productivity growth has struggled since the 2008 economic downturn, and the fall in the first quarter of 2017 brings to an end a recent run of quarters of positive growth,” said Philip Wales, head of productivity at the ONS. The UK has struggled to improve productivity, and the fall means that workers are now more expensive to employ, per unit of output, despite the squeeze on wages in recent years.
“The Bank of England has been particularly focused on measures of domestically generated inflation, so [Wednesday’s] productivity figures, including unit labour costs, are important,” said George Buckley, an economist with Nomura. “They show labour costs growing in excess of the Bank’s 2 per cent inflation target for the fourth consecutive quarter, though admittedly only modestly above at 2.1 per cent year-on-year”, he said.
Labour costs include non-wage costs like employers’ contributions to their employees’ pensions. Some employers have complained recently that the requirement to auto-enrol most staff into pensions has limited their ability to raise pay. Unit wage costs grew at a slower pace of 1.5 per cent in the first quarter. The members of the BoE’s interest rate setting committee who oppose raising rates can point to other data suggesting activity in the UK economy is weak, even as cost pressures rise.
Growth in the UK’s huge services sector was slower during June than in the previous month, according to an influential survey of purchasing managers working in the sector. The survey showed the 11th consecutive month of expansion, but business confidence and decision-making took a hit because of the general election, respondents said. Business optimism dropped to its second-lowest level since December 2011. It follows surveys for the manufacturing and construction sector that also showed growth slowing in June and, alongside car sales data, provides more evidence of underlying fragility in the UK economy.
The IHS services purchasing managers’ index fell to 53.4 in June, down slightly from 53.8 in May and below the consensus forecast from City economists of 53.5. Anything above 50 indicates an expansion in the sector. “A slowing in services sector growth completes a triple-whammy of disappointing PMI survey readings,” said Chris Williamson, chief business economist at IHS Markit.
“Although the three PMI surveys are running at levels that are historically consistent with GDP growing by around 0.4 per cent in the second quarter, it’s clear that the economy heads into the third quarter losing momentum,” he said. Share this graphic The British economy grew 0.2 per cent in the first quarter of the year. The slowdown was attributed to lower consumer spending as households cut back in the face of higher prices. The services PMI does not include the retail sector, which is thought to be among the most sensitive parts of the economy to any squeeze on household incomes. The eurozone composite PMI — which combines the construction, manufacturing and services sector, and was also published on Thursday morning — pointed to the currency bloc growing 0.7 per cent in the second quarter.
Allan Monks, an economist with JPMorgan, said: “The UK’s underperformance is hence even more pronounced in relative terms, and indicates that domestic activity remains a net drag on growth.” Other figures published by SMMT, the motor industry trade body, on Wednesday found that new car sales in the UK had fallen 4.8 per cent. “The drop in sales signals the softening in consumer confidence that has been seen more widely in the economy this year, and is in part a reflection of a decline in household income and recent political uncertainty,” said John Leech, head of automotive at KPMG.