New analysis shows UK productivity lags behind G7 contemporaries as past decade shows just 7% growth

• Fresh analysis from PwC UK shows that UK productivity levels increased by just 7% in the last decade.

• However, over the past two years (2021-22), UK productivity has grown at an annual average rate of 0.9%, almost double the annual average growth rate in the previous decade (0.5%).

• The UK is not alone in seeing subdued productivity growth since the Global Financial Crisis, with the US and the other advanced economies also experiencing slowdowns in their productivity growth.

• Since the GFC, manufacturing productivity has slowed, down from around 7% a year to less than 2%, which has brought down economy-wide productivity.

The UK has seen a significant dip in productivity growth since the Global Financial Crisis (GFC), according to fresh findings released today. However, this new analysis from PwC UK also highlights sectoral differences in productivity growth, with some sectors performing better than others in recent years. The slowdown in manufacturing productivity is also shown to have played a significant role in the fall in economy-wide productivity, but there is positive sentiment amongst manufacturers, with almost 1 in 5  expecting to see productivity gains of 10-25% in the coming year. According to PwC UK’s new UK Productivity Tracker, a lack of sustained investment expenditure may be behind the UK’s weak productivity performance.  

In terms of sectoral differences, manufacturing has seen a significant dip as the UK has evolved into a service based economy. Despite its lower prominence, the manufacturing sector has outperformed the services sector when it comes to labour productivity growth. In the twenty years prior to the pandemic (1999-2019), manufacturing labour productivity levels more than doubled (106% growth), while services productivity increased by just over one-fifth (21%). This exceptionally high productivity growth in the manufacturing sector, particularly in the decade preceding the GFC, has seen the sector make an out-sized contribution to whole economy productivity growth relative to the size of the sector (see chart below). 

Nick Atkin, Leader of Industrial Manufacturing and Services, at PwC UK, said:

"Our new UK Productivity tracker sets out to unpick the causes of the slowdown in UK productivity growth and outline practical steps businesses can take to improve productivity, with a focus on the manufacturing sector.   

“Our analysis shows that in the decade prior to the global financial crisis, the productivity levels of the average British worker increased by more than one-fifth (21%), however over the past decade productivity growth has slowed, increasing by just 7%.

“Given the significance of productivity in promoting long-term economic growth, supporting investment in R&D spending and technology, to achieve improvements in productivity is more important than ever. It’s clear that providing assistance to help foundational sectors, such as manufacturing, to evolve and transition, can fire up growth and create the kind of sustainable improvements needed.”

In the decade prior to the GFC, UK productivity levels increased by more than one-fifth (21%). While in the last decade, productivity levels increased by just over one-twentieth (7%). This is equivalent to a c. 75% slowdown in the rate of productivity growth. The UK is not alone in seeing subdued productivity growth since the crisis, with the US and the other advanced economies also experiencing slowdowns in their productivity growth. But the UK slowdown has been more dramatic than in its peer economies. Over the 2010 to 2021 period, UK productivity growth was the second slowest in the G7 group of advanced economies. 

Cara Haffey, Sector Leader of Manufacturing at PwC UK, said:

“For a long time, productivity growth in the UK economy was powered by manufacturing. In fact, between 1998 and 2007, manufacturing productivity growth contributed 54% to economy-wide productivity growth on average. However, since the financial crisis, manufacturing productivity has seen a broad-based slowdown, with the sharpest slowdowns occuring in sectors such as textiles and leather and electronics and optical. 

“As a sector, we have had to face the impact of sluggish demand, global supply chain disruptions and rising energy costs. However, there is optimism amongst manufacturers with more than one in three (36%) expecting productivity increases of up to 10% over the next year, and a further 19% expecting increases of between 10% and 25%.” 

In contrast the sector-by-sector story is more nuanced: services, including professional and business services, have not been automated to the same extent as manufacturing, and therefore the productivity growth has been slower. But this is now changing as the service sectors benefit from ever sharper analytics and the automation of routine tasks in areas ranging from sales processing to customer services and marketing. With professional talent in short supply, these tech-enabled capabilities are set to be increasingly critical in freeing up time and speeding up delivery.

Having trailed the market average in productivity growth in the years leading up to the GFC, output per head in Construction has grown,  with the past five years seeing an 11% increase, though this has dipped over the past year due to material shortages and rising energy costs. Investment per head in construction has been higher than the market average. Further gains have come from increased investment in services such as planning and design.

Jake Finney, Economist at PwC UK, said:

“The UK has struggled with slowing productivity growth since the financial crisis. The UK is not alone in this trend, with the US and the other advanced economies also experiencing slowdowns. But the UK slowdown has been more dramatic, with the UK posting the second slowest productivity growth amongst the G7 economies over the 2010 to 2021 period. The root cause is that the UK consistently invests less than its peers in the US, France and Germany.”

“Over the past two years, UK productivity growth has started to pick-up. However, it is our view that this uptick in productivity growth has been driven by exceptionally high consumer demand following the pandemic, so we expect that it will start to unwind as demand and work availability normalises over the course of 2023.” 

ENDS

Notes to editors 

The quarterly UK Productivity Tracker aims to unpick the causes of the slowdown in UK productivity growth and draws upon PwC industry expertise.