Sophie Piton and Fabrizio Cadamagnani
Quite a bit has been written about UK productiveness and the way weak it’s been lately. This submit assesses UK productiveness developments in a historic and cross-country perspective. Productiveness development has been weak throughout G7 economies over the previous 20 years, reflecting the top of the knowledge and communications know-how (ICT) revolution and the flattening features from globalisation. The slowdown was notably giant 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 influence of Brexit. In recent times, US productiveness development has been accelerating due to tech, providing some optimism for the way forward for UK productiveness.
Productiveness development is of key curiosity to policymakers together with the Financial Coverage Committee because it determines the ‘pace 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 development price of UK labour productiveness (output per hour) has been decrease than within the earlier century (Chart 1). Productiveness development 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 development since Covid.
Desk A: Labour productiveness (output per hour) annual development price for the market sector, annual common
UKUSFRDEEA191998–20072.5percent2.9percent2.4percent2.2percent1.9percent2008–190.3percent1.5percent0.7percent1.0percent1.0percent2020–25 Q30.7percent2.2%-0.3percent0.5percent0.6%
Be aware: ‘Enterprise sector’ is the enterprise sector within the US, the market sector within the UK and the entire 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 entire financial system, annual development price
Supply: Authors’ calculations utilizing the Lengthy-Time period Productiveness Database, 2026 version.
The ICT revolution and the excessive productiveness development 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 pressured the exit of much less productive manufacturing companies within the UK and different superior economies, and incentivised surviving companies to offshore their low-productive actions (this diminished the manufacturing sector’s share of employment in all G7 economies – Chart 2 panel B). Total, the consequence was very excessive development of labour productiveness in each manufacturing and tech providers, which lifted mixture productiveness development.
Chart 2: The distinctive efficiency of the manufacturing sector within the decade earlier than the GFC
Panel A: UK annual labour productiveness development (five-year transferring common), 1970–2024
Panel B: Share of producing in whole employment, per cent
Be aware: 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 development 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 widespread throughout all G7 economies, reflecting weak whole issue productiveness (TFP) greater than weak capital deepening. The literature suggests it marks the top of the ICT revolution but additionally displays the flattening of the features from globalisation.
Whereas a weakening of productiveness development may very well be anticipated after companies upgraded their manufacturing processes and productiveness reached a lot increased ranges, researchers have discovered the dimensions 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 giant companies; this excessive stage of focus discourages innovation and leads to a slowdown in productiveness development over the long term. Nonetheless, 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 development in manufacturing declined materially (‘inside impact’), it was nonetheless above the common of the opposite sectors (Chart 2 panel A). Nonetheless, 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 most important contributor to the productiveness slowdown throughout most G7 economies (Chart 3 panel A).
Chart 3: The position 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 development (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 information by {industry} in STAN begins in 1999. Panel A reveals the contribution of producing, each its ‘inside’ and ‘between’ results, to whole financial system productiveness development. Panel B reveals within-industry contributions utilizing the Tang-Wang methodology for market sector solely. Productiveness is output per hour.
Measured UK market-sector productiveness development 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 giant tutorial literature on the explanations for poor UK efficiency and nonetheless no consensus. We spotlight two key drivers.
First, the position of producing. Despite the fact that within the Nineteen Seventies the UK had the most important manufacturing share amongst G7 international locations, 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 development, on condition that productiveness is increased in manufacturing than in most different sectors.
Second, the UK has been affected by measurement points which have depressed its measured productiveness relative to see international locations. The publication of the ONS Bluebook 2021, which launched essential revisions to historic information, and most significantly ‘double deflation’, considerably diminished the measured UK productiveness slowdown for the reason that GFC, so the UK is throughout the G7 vary now. And a revision to the measurement of hours labored, because the ONS strikes from a ‘direct’ methodology to a ‘element’ methodology to minimise the bias from the secular decline in Labour Pressure Survey response charges, is more likely to result in additional upward revisions to UK productiveness development when carried out – preliminary estimates counsel a +0.4 share factors improve within the common annual development price 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 median of 0.7% per yr, considerably decrease than 2.2% within the US however barely increased than the European common of 0.6% (Desk A).
The latest provide shocks and information measurement points problem the interpretation of UK productiveness developments in addition to worldwide comparisons lately. The pandemic drove giant compositional results, reflecting the truth that the sectors most hit by lockdowns had been these with the bottom labour productiveness. When specializing in ‘within-industry’ productiveness development, and so abstracting from these compositional results, we will see that UK labour productiveness development was resilient via Covid after which began to say no in 2023 because the financial system slowed down. The timing differs relying on the info supply for the measure of hours, however all measures give comparable common development 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 top of 2028, with the impact weighting on productiveness development within the transition to this decrease stage. There’s nonetheless nonetheless loads of uncertainty on the magnitude and timing of the Brexit influence. New analysis suggests bigger impacts on commerce in providers than assumed thus far. In any case, it’s possible that within the absence of Brexit UK productiveness development would have been materially increased than in euro space international locations over the previous six years.
What in regards to the UK productiveness stage?
Evaluating ranges of labour productiveness is a difficult job 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 variety of estimates utilizing totally different strategies to compute hours labored to match 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 a long time. Chart 6 panel A, reveals 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 motive 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 on account of measurement points, because the UK specialises in industries the place intangible funding issues essentially the most and these property are tougher to seize.
Chart 6: The position 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 development
There’s an lively debate on ‘Eurosclerosis’, pointing to the persistent hole in productiveness development between US and European international locations in latest a long time (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 development pointing to the essential position of the US tech sector. Certainly, Chart 7 reveals that the contribution of IT and different info providers (together with AI firms) to whole US productiveness development 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 development 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 information.
Chart 7: Contribution of IT and different info providers to whole financial system annual labour productiveness (output per hour) development, 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 embrace 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 development is bigger within the UK than in different European economies (Chart 7), and the principle contributor to UK productiveness development within the latest interval (Chart 3 panel B). Cross-country proof means that the UK is simply behind the US when it comes to AI adoption. There are causes to assume AI adoption could materially and persistently raise UK productiveness development, though the timing and magnitude of AI impacts are extremely unsure.
To conclude, whereas the slowdown in productiveness development up to now 20 years was largely pushed by the top of the general-purpose ICT revolution, there’s hope that latest developments in AI could mark the beginning of a brand new general-purpose revolution. This affords some optimism for the way forward for UK productiveness, though there’s nonetheless loads 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.
If you wish to get in contact, please e mail us at bankunderground@bankofengland.co.uk or depart a remark beneath.
Feedback will solely seem as soon as accepted by a moderator, and are solely revealed the place a full identify is provided. Financial institution Underground is a weblog for Financial institution of England workers to share views that problem – or help – prevailing coverage orthodoxies. The views expressed listed here are these of the authors, and are usually not essentially these of the Financial institution of England, or its coverage committees.
Share the submit “Is UK productiveness development low? A historic and cross-country perspective”
