Is UK productiveness progress low? A historic and cross-country perspective – Financial institution Underground

Sophie Piton and Fabrizio Cadamagnani

Quite a bit has been written about UK productiveness and how weak it’s been lately. This submit assesses UK productiveness traits in a historic and cross-country perspective. Productiveness progress has been weak throughout G7 economies over the previous twenty years, reflecting the tip of the data and communications know-how (ICT) revolution and the flattening features from globalisation. The slowdown was significantly massive within the UK, primarily as a result of it skilled a bigger decline within the share of producing than friends after which due to the impression of Brexit. In recent times, US productiveness progress has been accelerating because of tech, providing some optimism for the way forward for UK productiveness.

Productiveness progress is of key curiosity to policymakers together with the Financial Coverage Committee because it determines the ‘velocity restrict’ of the financial system within the brief/medium run and is the first driver of residing requirements in the long term. Because the international monetary disaster (GFC), the annual progress charge of UK labour productiveness (output per hour) has been decrease than within the earlier century (Chart 1). Productiveness progress has been weak throughout superior economies, however the UK has been beneath the US and EA19 common, averaging 0.5% for the market sector over 2008 to 2025 (Desk A). The US has averaged 1.7%, nicely above friends, partly pushed by robust productiveness progress since Covid.

Desk A: Labour productiveness (output per hour) annual progress charge for the market sector, annual common

Observe: ‘Enterprise sector’ is the enterprise sector within the US, the market sector within the UK and the full financial system excluding principally public sectors and actual property in Europe.

Sources: Authors’ calculations utilizing BLS, Eurostat and Workplace for Nationwide Statistics (ONS).

Chart 1: Output per hour for the full financial system, annual progress charge

Supply: Authors’ calculations utilizing the Lengthy-Time period Productiveness Database, 2026 version.

The ICT revolution and the excessive productiveness progress of the Nineteen Nineties/2000s

The manufacturing and tech providers sectors skilled an distinctive transformation within the Nineteen Nineties and early 2000s with unprecedented productiveness features (Chart 2 panel A). This transformation displays the adoption of recent general-purpose applied sciences following the ICT revolution (diffusion of computer systems, web, and enterprise software program). As well as, robust international competitors compelled the exit of much less productive manufacturing corporations within the UK and different superior economies, and incentivised surviving corporations to offshore their low-productive actions (this diminished the manufacturing sector’s share of employment in all G7 economies – Chart 2 panel B). General, the outcome was very excessive progress of labour productiveness in each manufacturing and tech providers, which lifted mixture productiveness progress.

Chart 2: The distinctive efficiency of the manufacturing sector within the decade earlier than the GFC

Panel A: UK annual labour productiveness progress (five-year transferring common), 1970–2024

Panel B: Share of producing in whole employment, per cent

Observe: Labour productiveness is output per hour.

Sources: Authors’ calculations utilizing ONS MFP 2025 launch (panel A) and STAN 2025 launch (panel B).

The decline in productiveness progress from the mid-2000s

There are discussions as to when the productiveness decline began, the most recent proof suggesting it began as early because the mid-2000s, earlier than the GFC. This decline is frequent throughout all G7 economies, reflecting weak whole issue productiveness (TFP) greater than weak capital deepening. The literature suggests it marks the tip of the ICT revolution but in addition displays the flattening of the features from globalisation.

Whereas a weakening of productiveness progress may very well be anticipated after corporations upgraded their manufacturing processes and productiveness reached a lot greater ranges, researchers have discovered the size of this slowing puzzling given the persevering with excessive funding in R&D in these sectors after the GFC (for instance Lashkari and Pearce (2024) or Goldin et al (2024)). A few of the explanations proposed for the productiveness slowdown within the US level to IT innovation resulting in a decline in enterprise dynamism, specifically within the manufacturing sector, and a rise in gross sales focus amongst a number of massive corporations; this excessive stage of focus discourages innovation and ends in a slowdown in productiveness progress over the long term. Nevertheless, whereas the proof on the decline in enterprise dynamism is stark within the US, the proof is extra blended throughout the Atlantic and within the UK specifically (for instance Gutierrez and Piton (2020)), the place productiveness slowed down essentially the most.

Even when productiveness progress in manufacturing declined materially (‘inside impact’), it was nonetheless above the typical of the opposite sectors (Chart 2 panel A). Nevertheless, the share of the manufacturing sector in GDP additionally declined considerably (‘between impact’). These two results meant that the contribution of producing to whole financial system productiveness declined considerably. Consequently, in accounting phrases, manufacturing is the biggest contributor to the productiveness slowdown throughout most G7 economies (Chart 3 panel A).

Chart 3: The function of producing within the UK productiveness slowdown

Panel A: Whole productiveness slowdown (2010–19 versus 1998–07, per cent) and manufacturing sector contribution (inside + between results, share factors)

Panel B: UK annual common productiveness progress (market sector, per cent) and sector contributions (share factors)

Sources: Authors’ calculations utilizing STAN 2025 launch (panel A) and ONS MFP 2025 launch (panel B).

* US productiveness knowledge by {industry} in STAN begins in 1999. Panel A exhibits the contribution of producing, each its ‘inside’ and ‘between’ results, to whole financial system productiveness progress. Panel B exhibits within-industry contributions utilizing the Tang-Wang methodology for market sector solely. Productiveness is output per hour.

Measured UK market-sector productiveness progress was 0.3% per yr on common over 2008–19, very weak each in absolute phrases and relative to different G7 economies (Chart 1 and Desk A). There’s a massive tutorial literature on the explanations for poor UK efficiency and nonetheless no consensus. We spotlight two key drivers.

First, the function of producing. Though within the Seventies the UK had the biggest manufacturing share amongst G7 nations, the scale of the sector declined by greater than friends and by the point of the GFC the manufacturing share was the bottom within the G7 group (Chart 2 panel B). A decrease manufacturing share helps to clarify the UK’s decrease mixture productiveness progress, on condition that productiveness is greater in manufacturing than in most different sectors.  

Second, the UK has been affected by measurement points which have depressed its measured productiveness relative to look nations. The publication of the ONS Bluebook 2021, which launched necessary revisions to historic knowledge, and most significantly ‘double deflation’, considerably diminished the measured UK productiveness slowdown for the reason that GFC, so the UK is inside the G7 vary now.  And a revision to the measurement of hours labored, because the ONS strikes from a ‘direct’ technique to a ‘part’ technique to minimise the bias from the secular decline in Labour Drive Survey response charges, is more likely to result in additional upward revisions to UK productiveness progress when applied – preliminary estimates counsel a +0.4 share factors enhance within the common annual progress charge over 2008–19.

Productiveness developments for the reason that Covid pandemic

Because the pandemic (2020–25), UK market-sector labour productiveness has grown at a mean of 0.7% per yr, considerably decrease than 2.2% within the US however barely greater than the European common of 0.6% (Desk A).

The latest provide shocks and knowledge measurement points problem the interpretation of UK productiveness traits in addition to worldwide comparisons lately. The pandemic drove massive compositional results, reflecting the truth that the sectors most hit by lockdowns have been these with the bottom labour productiveness. When specializing in ‘within-industry’ productiveness progress, and so abstracting from these compositional results, we are able to see that UK labour productiveness progress was resilient by way of Covid after which began to say no in 2023 because the financial system slowed down. The timing differs relying on the information supply for the measure of hours, however all measures give comparable common progress charges for UK productiveness over the 2020–25 interval.

Brexit has been a key headwind to UK productiveness. The Financial institution of England’s central estimate is that Brexit will depart the extent of potential productiveness within the UK 3¼% decrease than in any other case by the tip of 2028, with the impact weighting on productiveness progress within the transition to this decrease stage. There’s nonetheless nonetheless a whole lot of uncertainty on the magnitude and timing of the Brexit impression. New analysis suggests bigger impacts on commerce in providers than assumed up to now. In any case, it’s probably that within the absence of Brexit UK productiveness progress would have been materially greater than in euro space nations over the previous six years.

What in regards to the UK productiveness stage?

Evaluating ranges of labour productiveness is a difficult activity and depends on comparable measures of output, hours labored and value ranges (comparisons are made in buying energy parity, or ‘PPP’, phrases to account for variations in the price of residing). The ONS publishes a spread of estimates utilizing completely different strategies to compute hours labored to check G7 economies, which means that in 2019 UK labour productiveness was c.20% decrease than US productiveness.

Allas and Zenghelis (2025) hyperlink the low stage of UK productiveness relative to its main friends to the cumulative impact of weak funding charges over a number of many years. Chart 6 panel A, exhibits that the UK enterprise investment-to-GDP ratio has been decrease than in different G7 economies for the reason that flip of the century. The decline of the manufacturing share of the UK financial system is a key cause for this – the UK investment-to-GDP ratio excluding manufacturing has been near the US and G7 common (Chart 6 panel B).  A few of the relative weak point in UK funding charges in different sectors may be because of measurement points, because the UK specialises in industries the place intangible funding issues essentially the most and these belongings are more durable to seize.

Chart 6: The function of producing within the UK investment-to-GDP ratio

Panel A: Market sector funding share in GDP, 1995–2021

Panel B: Market excluding manufacturing sector funding share in GDP, 1995–2021

Sources: Authors’ calculations utilizing EU KLEMS 2025 launch.

Tech, the US exception and prospects for UK productiveness progress

There’s an energetic debate on ‘Eurosclerosis’, pointing to the persistent hole in productiveness progress between US and European nations in latest many years (Desk A). It’s nonetheless unclear whether or not this has translated right into a relative enchancment in residing requirements for the US over this era.

The Draghi report on EU competitiveness (2024) highlighted this divergence in productiveness progress pointing to the necessary function of the US tech sector. Certainly, Chart 7 exhibits that the contribution of IT and different info providers (together with AI corporations) to whole US productiveness progress is bigger than in European economies and the hole has been rising. Within the US, this sector is lower than 4% of whole output however has contributed 12% to whole productiveness progress within the final three years. Whereas a few of this might mirror early features from AI, it additionally displays robust automation/digitalisation funding following the pandemic. This dynamism in tech can also be mirrored in robust enterprise creation within the US tech sector not seen in UK knowledge.

Chart 7: Contribution of IT and different info providers to whole financial system annual labour productiveness (output per hour) progress, three-year transferring averages, share factors

Sources: Authors’ calculations utilizing STAN 2025 launch and ONS February 2026 productiveness by division launch for the UK.

* EU3 embody France, Germany and Italy. IT and different info providers correspond to sector J62_63.

But, the UK additionally has a robust tech sector. The contribution of IT and different info providers to whole financial system annual labour productiveness progress is bigger within the UK than in different European economies (Chart 7), and the principle contributor to UK productiveness progress within the latest interval (Chart 3 panel B).  Cross-country proof means that the UK is simply behind the US by way of AI adoption. There are causes to suppose AI adoption might materially and persistently raise UK productiveness progress, though the timing and magnitude of AI impacts are extremely unsure.

To conclude, whereas the slowdown in productiveness progress up to now twenty years was largely pushed by the tip of the general-purpose ICT revolution, there may be hope that latest developments in AI might mark the beginning of a brand new general-purpose revolution. This presents some optimism for the way forward for UK productiveness, though there may be nonetheless a whole lot of uncertainty on the character and timing of the change that AI goes to deliver.

Sophie Piton and Fabrizio Cadamagnani work within the Financial institution’s Structural Economics Division.

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