Market Watch

Low Productivity Biggest Threat to UK Economy

11 Dec , 2014  

Market Watch ThursThe “productivity puzzle”, and how it might resolve itself is the biggest threat to the UK's economic recovery according to the head of the Office for Budget Responsibility (OBR).

Robert Chote said that the economy also faced uncertainty from the eurozone, and from other geopolitical pressures, but that the gap between increase output but decreased productivity is the biggest problem.

The UK is known to be less productive than other similar developed countries, especially since the onset of the 2007-08 financial crises. Labour productivity in the UK has been weak, with this shortfall often called the "productivity puzzle".

Measures of productivity, essentially the quantity of goods and services produced per worker or per hour, can be used to inform estimates of an economy's ability to grow without generating too much inflation. Therefore, it is an important factor for the Bank of England to consider when making interest rate decisions as it helps it to forecast inflation.

Speaking to the Treasury Select Committee, Mr. Chote confirmed that while wage growth coupled with productivity growth was desirable, salary increases without any accompanying productivity growth was not a welcome development.

Mr. Chote also told MPs that while wage growth and consumer spending had increased, much of the UK employment growth had been in relatively low-paid work where people pay less tax, meaning that the amount of tax generated in the UK from economic activity had fallen.

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