UK productivity saw record deterioration in second quarter of this year

UK productivity, measured in terms of output per hour worked, saw a record decline in the second quarter of this year as it fell 2.5% quarter-on-quarter, according to a “flash” estimate from the Office for National Statistics (ONS).

Output per hour worked fell 2.5% quarter-on-quarter in the second quarter of 2020 as gross value added (GVA) contracted a record 20.4% while hours worked declined 18.4%.

Every sector in the UK economy saw a quarter-on-quarter fall in output per hour in the second quarter. Construction saw by far the largest fall of 11.4%, followed by services (2.5%) non-manufacturing production (0.5%) and manufacturing (0.3%).

However, the ONS reported that the results on a sector level mask much larger changes in the constituent industries. By far the most significant fall in output per hour was in the hotels and catering industry. Productivity in this industry decreased by 74.7%. The second largest fall was in transport equipment manufacturing, which fell by 34.4%.

Output per hour worked was down 3.0% year-on-year in the second quarter. The ONS has said that quarterly movements in productivity measures can be erratic so year-on-year rates gives a better indication of trend – although it did observe that “the immediate nature of change has led to us highlighting the comparison with the previous quarter in this flash estimate.” This followed a decline in output per hour worked of 1.3% quarter-on-quarter and 0.6% year-on-year in the first quarter.

Output per hour worked had previously edged up just 0.1% overall in 2019 after a small gain of 0.5% in 2018. There had been modest improvement in productivity over the second half of 2019 after weakness over the first half of the year and the second half of 2018. Output per hour worked had risen 0.2% quarter-on-quarter in the fourth quarter of 2019 following a gain of 0.5% quarter-on-quarter in the third quarter.

It had previously been flat quarter-on-quarter in the second quarter and fallen 0.4% quarter-on-quarter in the first quarter. Year-on-year growth in output per hour was limited to just 0.4% in the fourth quarter of 2019, as it had been in the third quarter. While slight, these were the equal strongest annual gains since the second quarter of 2018.

Prior to the third quarter of 2019, output per hour had fallen year-on-year for four successive quarters, including a drop of 0.4% in the second quarter of 2019, which had been the largest annual decline since the second quarter of 2014.

Howard Archer, chief economic advisor to the EY ITEM Club, commented on the data: “The UK’s ‘productivity puzzle’ is a source of much debate and analysis. Part of the UK’s recent poor labour productivity performance has undoubtedly been that low wage growth has increased the attractiveness of employment for companies. This helped employment to hold up well during the 2008/9 downturn and to pick up as growth returned. 

“It also appears that many companies took on labour rather than committing to costly and difficult-to-reverse investment in recent years, given the uncertain economic and political outlook. The low cost and flexibility of labour relative to capital has certainly supported employment over investment.

“Extended uncertainties over Brexit caused companies to limit their investment with implications for productivity. Significantly, business investment has been low since the second half of 2017 and it rose just 0.8% in 2019 after contraction of 1.5% in 2018. Business investment fell 0.3% quarter-on-quarter in the first quarter of 2020 and then fell a record 31.4% quarter-on-quarter in the second quarter. This meant that business investment in the second quarter of 2020 was 32.3% below its peak level in the fourth quarter of 2017.”

He concluded: “The risk is that COVID-19’s impact on the UK economy over the first half of 2020 has a lasting negative impact on productivity and UK growth potential. In particular, business investment has been pared back and there is the risk that companies will be very cautious for an extended period in new investments.”

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