everthingIt has been called the most important economic indicator of the lot, and last week brought news that it got better. Is UK productivity finally improving?

“Productivity isn’t everything, but it is almost everything,” or so Nobel laureate Paul Krugman once said. If that is right, then almost everything improved in the third quarter of last year.

UK output per head grew by 0.4 per cent in Q3, from the quarter before, estimates the Office of National Statistics.

That’s an okay performance. Total output across the UK is the product of output per hour, and the total number of hours worked. Or to put it more simply, it is a function, of total employment and output per employee.

In recent years, the UK economy has largely grown on the back of rising employment, growth in productivity had been lamentable.

Between August and October last year – the most recent period for which we have data, UK employment barely changed from the previous three-month period. And with total percentage employment rising to a record high last year, there is not much scope for employment to rise further.

That means that the UK economy is now reliant on either a growing labour market, a shift from less part-time to full-time working, or growth in productivity. Productivity is surely the key.

There is also a link between productivity growth, wages and inflation. In Q3, while productivity grew, earnings grew faster, and that isn’t sustainable long-term. And indeed, while the 0.4 per cent expansion was the fastest seen since the first quarter of 2015, the average growth in productivity was much higher between 1994 and 2007, and despite growth in Q3, total output per hour at the end of the quarter was a mere 1.1 per cent higher than in Q3 2016, just before the downturn.

Across the G7, only Japan has lower output per hour than the UK.

Richard Heys, Deputy Chief Economist, ONS said "These estimates of productivity show that while labour productivity is improving, particularly in the services sector, it is still weak compared to that experienced in the recent past, both in terms of the level of productivity and the rate of growth. ONS is continuing to explore potential reasons for this.”