Eighteen years of stagnation, and no one can fully explain it. Marcus Webb examines the competing theories and what they mean for England's economic future.
In the years before the financial crisis, UK productivity — output per hour worked — grew at roughly 2 per cent per year. It was not spectacular growth, but it was steady, and it was consistent with the long-run trend. Then, in 2008, it stopped. And it has never really recovered.
This is not a minor statistical curiosity. Productivity growth is the foundation of rising living standards. If workers produce more per hour, there is more to distribute — in wages, in profits, in tax revenue for public services. When productivity stagnates, everything else becomes harder. The puzzle of why it stopped, and what might restart it, is arguably the most important economic question facing England.
There is no shortage of explanations. The most widely cited is the "zombie firm" hypothesis: that low interest rates after 2008 kept unproductive businesses alive that would otherwise have failed, preventing the reallocation of capital and labour to more productive uses. There is some empirical support for this, though it does not fully account for the scale of the slowdown.
A second theory focuses on investment. UK business investment as a share of GDP has been consistently lower than in comparable economies. If firms are not investing in new equipment, new technology and new processes, productivity will not improve. The reasons for low investment are themselves contested — some point to short-termism in corporate governance, others to uncertainty about policy, others to the structure of the financial system.
"We have been trying to solve this puzzle for eighteen years. The honest answer is that we still don't fully understand it."
— Professor James Hartley, Institute for Fiscal Studies
The productivity gap between the UK and comparable economies — France, Germany, the United States — has widened since 2008. UK output per hour is now approximately 15 per cent below the G7 average. The gap is not uniform across sectors: financial services and some parts of the technology sector have maintained reasonable productivity growth. The drag comes largely from retail, hospitality, social care and construction — sectors that employ large numbers of people and that have seen little technological transformation.