UK productivity falls at joint-fastest rate since 2013: ONS

LONDON (Reuters) - British productivity fell at its joint-fastest rate since 2013 in the 12 months after the country voted to leave the European Union, data showed on Friday, underscoring the main challenge facing the economy as Brexit approaches.

A worker inspects biscuits on the production line of Pladis' McVities factory in London Britain, September 19, 2017. REUTERS/Peter Nicholls.

Britain has long struggled to squeeze more output from its workers as many companies have been hiring extra staff rather than investing in new equipment. That has resulted in unemployment falling to its lowest level in more than 40 years even as wage growth has been weak.

British workers’ output per hour last year was more than 15 percent below that in other major advanced economies, a gap that has widened sharply since the 2008 financial crisis and shows no sign of narrowing significantly.

Output per hour worked in the three months to June was 0.3 percent below its level in the three months to June 2016, the Office for National Statistics said. No bigger fall has been recorded since the third quarter of 2013.

Before the crisis, annual productivity growth averaged more than 2 percent.

Economists mostly think Brexit - which raises the prospect of fewer skilled workers coming to Britain and less access to Britain’s key EU export markets - will make catching up even harder.

“A major risk is that prolonged uncertainty and concerns over the UK’s economic outlook ends up weighing down markedly on business investment and damages productivity. Prolonged difficult Brexit negotiations would increase this risk,” said Howard Archer, economist at consultants EY ITEM Club.

Weaker productivity will also weigh on Britain’s public finances, complicating the task of finance minister Philip Hammond as he prepares an annual budget statement for Nov. 22.

The Office for Budget Responsibility, an independent government agency that produces budget forecasts, predicted in March that output per hour would grow 1.4 percent this year and 1.5 percent in 2018.

However the OBR, like most economic forecasters, has been over-optimistic on British productivity growth in the past.

The Financial Times said the OBR would cut its assumptions about future productivity growth and lower its overall economic growth forecasts as a result, leaving Hammond with less room to raise public spending if a slowdown in the economy worsens.

Slower productivity increases the amount of Britain’s budget deficit that has to be reduced by spending cuts or tax hikes, rather than disappearing of its own accord as the economy grows.

“It’s certainly going to cause the chancellor a lot more trouble than he was hoping,” Paul Johnson, head of the Institute for Fiscal Studies think tank, told BBC radio.

The risk of weaker productivity growth, due in part to economic disruption caused by Brexit, is also a key reason why the Bank of England is pressing ahead with plans to reverse last year’s cut in interest rates.

Governor Mark Carney has said the pace the economy can grow without generating excessive inflation has fallen. Most BoE policymakers have said they expect to raise rates for the first time in over a decade in the coming months, if the economy develops as expected.

But Friday’s data showed that a key gauge of domestic inflation pressures had fallen.

Annual growth in unit labor costs - the cost to employers to produce a given amount of output - was its slowest in over a year at 1.6 percent, down from 2.4 percent in the first quarter of 2017.

Reporting by David Milliken, graphic by Andy Bruce; Editing by William Schomberg and Hugh Lawson