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UK productivity plummets in fourth quarter at fastest rate since financial crisis

LONDON (Reuters) - British economic productivity fell late last year at the fastest pace since the depths of the financial crisis, raising fresh doubt about the economy’s underlying health after government forecasters cut their long-run outlook last month.

A worker walks through a construction site in central London July 2, 2014. REUTERS/Luke MacGregor

Higher productivity -- or output per hour worked -- is the key to rising living standards in advanced economies, but it has increased far more slowly than expected in Britain since the financial crisis, contributing to lacklustre wage growth.

Economists have been at a loss to fully explain the trend, with various initial explanations looking less plausible as the 2008-09 financial crisis has faded, and the Bank of England struggling to see if it will push up underlying inflation.

Output per hour worked contracted by 1.2 percent in the three months to December compared with the July-September period, the biggest decline since the end of 2008 and reversing a 0.6 percent rise in the third quarter.

Britain’s economy as a whole grew by 0.6 percent in the fourth quarter of 2015 - roughly in line with its long run average, suggesting growth was achieved by more people working longer, rather than more effectively.

“The marked relapse in productivity ... is undeniably very disappointing and it does raise serious, justifiable questions about likely future developments,” IHS Global Insight chief UK economist Howard Archer said in a note to clients.

Figures for 2015 as a whole were somewhat less bad, with output per hour up 0.9 percent - the biggest rise since 2011 and a shade faster than the 0.8 percent forecast by the Office for Budget Responsibility last month.

The OBR handed Chancellor George Osborne a budget headache when it cut its productivity growth forecast by an average 0.2 percent a year for the next five years, making it harder for him to reach his goal of a budget surplus.

Normally weak productivity goes hand in hand with higher inflation, something the Bank might welcome currently as annual consumer price inflation of 0.3 percent is well below its 2 percent target.

But Thursday’s figures showed that unit labour cost growth -- the amount employers must pay for a given amount of output -- also slowed, dropping to a year-on-year rate of 1.3 percent, its lowest since mid-2013 and in line with Bank forecasts.

The Bank expects labour cost growth to pick up to 2.25 percent by the end of this year - blaming lower productivity from renewed hiring of low-skilled workers for temporarily pushing it down - but has been wrongfooted on wages before.

“If an imminent rate hike was on a knife edge, this data release would have just pushed (it) into the long grass. But with a rate hike a distant prospect, this release merely confirms the market thinking,” Scotiabank economist Alan Clarke said.

Reporting by Andy Bruce; Editing by David Milliken/Mark Heinrich

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