UK productivity, which has lagged behind most G7 nations since the financial crisis, unexpectedly picked up in the third quarter of last year, recording its biggest increase since 2011.

UK productivity potential for reversal of fortune

Official figures from the Office for National Statistics (ONS) showed that economic output per hour worked grew by 0.9 per cent in the three months to September, thanks to stronger growth in manufacturing and financial services output.Howard Archer, EY Item Club’s chief economic adviser, said it was likely that there had also been further growth in productivity in the final quarter of 2017. “A much-needed pick-up in UK productivity in the third quarter, as output per hour rose 0.9 per cent quarter-on-quarter, is the best performance since the second quarter of 2011,” he said.“However, this followed declines in both the second and first quarters, and output per hour was still up only 0.8 per cent year-on-year.“The marked third-quarter rebound suggests that some of the first-half 2017 weakness in productivity may have been cyclical.“Businesses may have been keen to employ given concerns over potential labour shortages and also given the low cost of labour, particularly relative to capital. “The rebound in productivity in the third quarter is highly welcome, but it needs to be seen in the context of a particularly poor first half performance.”Philip Shaw, chief economist at Investec, said falling numbers of people entering the workforce and fewer hours worked were also key reasons for the gains. When fewer people work fewer hours but economic output holds steady, efficiency levels naturally rise, he said. “I’d take one quarter’s numbers with a pinch of salt. It’s not at all bad news but difficult to embrace as a big change just yet in what is a disappointing history since (the financial) crisis,” he added.

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UK introduces Industrial Strategy

The government has made a top priority of boosting the UK’s productivity with additional investments in technology, infrastructure and training as part of its Industrial Strategy.Chancellor of the Exchequer Philip Hammond welcomed the latest figures. “We’re investing in skills, housing and transport to improve productivity, which is vital for raising wages and making our economy fit for the future,” he wrote on Twitter.

Unit labour costs continue to increase

The ONS data also showed that unit labour costs (ULCs) increased for the tenth consecutive quarter but at the slowest rate since Q2 2015. In the year to September, they grew by 1.3 per cent.The ONS said that changes in labour costs were a significant factor in the overall cost of production. “If increased costs are not reflected in increased output, for instance, this can put upward pressure on the prices of goods and services – sometimes referred to as ‘inflationary pressure’,” it said.ULCs have gone up by around two per cent for the past two years, after a period of low or negative growth. This rise has been caused by higher hourly labour cost growth but with virtually no output per hour growth to offset it.

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Read more about the future of the UK business in the Winter issue of our magazine 

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