April 1, 2015 / 9:38 AM / 5 years ago

UK's sluggish productivity worsened in late 2014 - ONS

LONDON (Reuters) - British economic productivity fell in the last three months of 2014 and remains well below its pre-financial crisis level, underscoring the challenge of making the country’s recovery sustainable in the long term.

A passenger uses an escalator in a London Underground station June 23, 2010.REUTERS/Andrew Winning

Output per hour worked dropped by 0.2 percent in the fourth quarter of 2014 compared with the previous three-month period, its first fall since mid-2013, the Office for National Statistics said on Wednesday.

Productivity has been very weak since the crisis as output as grown far more slowly than employment, in contrast to most other big advanced economies and Britain’s own pre-crisis economic performance.

“The absence of productivity growth in the seven years since 2007 is unprecedented in the post-war period,” the ONS said.

Britain grew at its fastest rate since 2006 last year — due in part to more people working longer hours — but most economists say higher productivity growth is the only way to boost living standards in the long run.

Labour opposition leader Ed Miliband said weak productivity was Britain’s “biggest economic challenge” when he presented his party’s business policies on Monday ahead of May 7’s election.

Wednesday’s ONS data showed overall hourly productivity grew only marginally in 2014 and by less than the 0.5 percent forecast made by the Bank of England in February.

The BoE says annual productivity growth is likely to pick up to 0.75 percent this year and 1.5 percent next, close to its long-run average.

But the BoE has been wrong on productivity before. Howard Archer, economist at IHS Global Insight, said there could be an underlying problem.

“If productivity has taken a significant lasting hit, it means that the economy has less potential to grow without generating inflationary pressures and that interest rates will need to rise at an earlier stage,” he said.

Inflation pressures appear muted and headline consumer price inflation is zero, far below the BoE’s 2 percent target. Unit labour costs — a measure of how much employers pay for a worker to produce a fixed amount — rose by an annual 1.2 percent in the last three months of 2014.

Citi economist Michael Saunders said this suggested further weak productivity was unlikely to push up inflation soon.

“ULC growth is clearly below the pace consistent with the ... inflation target. Even if productivity growth does not pick up, modestly higher pay growth would still be consistent with the inflation target,” he said.

Reporting by David Milliken; editing by William Schomberg/Jeremy Gaunt

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