UK productivity slowdown worst since Industrial Revolution – study

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The slowdown in Britain’s productivity growth over the last decade is the worst since the start of the Industrial Revolution 250 years ago, a dismal track record that is holding back gains in living standards across the country.

Research from academics at the University of Sussex and Loughborough University shows that the productivity growth slowdown since the 2008 financial crisis is nearly twice as bad as the previous worst decade for efficiency gains, 1971-1981, and is unprecedented in more than two centuries.

Growth in productivity – a measure of economic output per hour of work – has failed to rise in Britain at anywhere near the rates recorded prior to the banking crisis, with severe consequences for living standards. Economists believe productivity growth is vital for lifting GDP and higher wages.

Focusing on episodes in history when previous decades suffered from weak gains in economic efficiency, the academics said the current slowdown had left productivity almost 20% below the level it would have hit had Britain managed to maintain the growth recorded before the crisis.

Prof Nicholas Crafts and Prof Terence Mills, among Britain’s foremost economic historians, said productivity growth had been dragged down by a combination of three problems: the lasting effect of the 2008 crisis for the financial system; weaker gains from computer technologies in recent years after a boom in the late 1990s and early 2000s; and intense uncertainty over post-Brexit trading relationships sapping business investment.

In a research paper to be published in the National Institute Economic Review this week, they warn there has been no previous point in UK history when these three phenomena occurred in such a short space of time.

Crafts said: “It has been shockingly bad. Brexit then comes along towards the end of this 10-year period. Obviously we’ve not yet seen the ultimate effects on trade costs, but it’s undermined investment and diverted a lot of managerial time to contingency planning, rather that what you would think of as more productive activity.”

In December, the Royal Statistical Society made the average annual increase in productivity over the past decade – just 0.3% – its statistic of the 2010s, chosen to reflect Britain’s economic problems and the sharp contrast with the pre-crisis period, when growth averaged around 2% a year. Average pay after inflation remains below pre-crisis levels, partly due to productivity.

Boris Johnson made raising the nation’s productivity a central plank of his general election campaign, promising to boost public spending on transport infrastructure and education, and to narrow the gap between Britain’s most productive region – London and the south-east – and the rest of the country. The chancellor, Sajid Javid, has said he wants to raise productivity to help deliver annual UK GDP growth of as much as 2.8%.

However, the Bank of England warned last week that Brexit would strike a severe blow to the productive capacity of the UK economy, as higher trade barriers harm efficiency gains. It said Britain could only grow at around 1.1% on average until 2023 without excess inflation – about half the rate before the EU referendum.

According to Crafts and Mills, the productivity shortfall from a previous trend of growth is about twice that at the end of the 1970s, when productivity gains deviated from the trend recorded in the “golden age” of postwar growth by around 10.9%.

The 2010s are also almost four times as bad as the Edwardian “climacteric” and the depression of the 1930s. The climacteric – a term used by economic historians to describe a period of low productivity growth at the turn of the 20th century – occurred between the end of the age of steam and the widespread adoption of electricity.

Productivity growth at the dawn of the industrial revolution, between 1760 and 1800, averaged -0.13%, before the gains from the invention of steam power spread through Britain. Although the decline in productivity in that period was worse than the 2010s, Crafts and Mills said this did not follow a previous period of strong growth, rendering the 2010s unprecedented.

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