UK's productivity problem rears its head in early 2018

LONDON (Reuters) - British productivity contracted at the fastest pace in a year in early 2018, reversing some of the gains made last year and highlighting a long-standing problem in Britain’s economy, official data showed on Friday.

FILE PHOTO: Workers assemble Vauxhall Vivaro vans on the production line at Vauxhall's Luton plant in Luton, Britain, April 4, 2018. REUTERS/Toby Melville

There were also signs of the kind of inflation pressure that the Bank of England is expected to douse by raising interest rates.

Productivity in Britain has stagnated since the global financial crisis, even more than in most other advanced economies, and has played a key role in squeezing Britons’ living standards.

Over the past 10 years, productivity growth was the weakest since modern records began and appears to be the slowest since the early 1820s, when Britain was emerging from the Napoleonic wars.

From January through March, output per hour worked fell by 0.4 percent quarter-on-quarter, the biggest decline in a year, following a 0.6 percent rise in late 2017, the Office for National Statistics (ONS) said.

Some of the weakness might reflect a broad economic slowdown during snowy and icy weather in early 2018, but analysts said they saw the same old picture emerging from Friday’s data.

“The relapse in productivity ... after the rebound in the second half of 2017 is particularly disappointing as there needs to be sustained improvement to ease concerns over the UK’s overall poor productivity record since the deep 2008/9 recession,” Howard Archer, chief economic adviser to the EY ITEM Club consultancy, said.

Weak productivity growth means Britain’s economy is less able to expand without generating inflation.

The Bank of England has judged the economy will struggle to grow much faster than 1.5 percent a year before it starts to overheat -- one reason why it thinks interest rates will need to rise over the next few years.

The ONS said output per hour worked in the first quarter was 0.9 percent higher compared with a year ago. Productivity growth by this measure has yet to even touch its pre-crisis peak.

Friday’s data showed unit labour costs - a measure of how much it costs to produce a given amount of output, and a key driver of inflation - rose by an annual 3.1 percent in the first quarter, the biggest increase since late 2013.

“On this measure at least, (BoE) hawks are right that labour-based inflation pressures are broadening,” Simon French, chief economist at Panmure Gordon, said on Twitter.

On Thursday, BoE Governor Mark Carney said inflation pressures had continued to mount as the BoE expected, and that there was widespread evidence that slack in the economy had been largely used up.

Reporting by Andy Bruce, editing by William Schomberg, Larry King