The Great Productivity Challenge in the UK – Analysis by Mike Bell, CFA

Mike Bell, CFA — Market Strategist and Head of Investment Specialists for EMEA & Asia at JP Morgan Asset Management (Global Liquidity) — clearly presents two issues that define the outlook for the British economy: chronic productivity weakness and persistent pressures on the private sector labour market. Its central thrust is simple but demanding: to raise real wages and living standards, output per hour worked must increase, without this meaning fewer jobs.

The big picture of productivity

According to Bell, since 2008, productivity in the UK has been growing at a significantly lower rate than before the global financial crisis. The first figure clearly shows that the post-2008 trajectory is below the pre-crisis “trend”. This is the starting point: the economy is working, but it is producing less per hour than by old standards.

The second critical observation is that the pre-2008 productivity “miracle” was overly fueled by the financial sector and was unsustainable. After the crisis, the same sector went from being a driver to a drag on overall productivity—which explains why a return to the old trajectory does not happen automatically.

Looking at the industries separately, professional services (lawyers, accountants, engineers, consultants, IT service companies, etc.) have not shown measurable productivity growth since 2004. Hourly pricing, reliance on human time, and slow penetration of automated workflows explain the stagnation.

In retail, the picture is also subdued. Despite digital transformation and investments in e-commerce and logistics, the physical + online “dipole” is increasing costs and eroding margins, leaving little net benefit to productivity.

In the public sector, Bell singles out health as the biggest negative factor. Increased demand, administrative complexity, and costs are putting pressure on efficiency. Important clarification: excluding health and education, productivity in the rest of the state has improved since 2008 — so the problem is localized, not generalized.

On the positive side, manufacturing shows that productivity can be substantially improved through capital investment, automation, and better organization. The movement is gradual, but steady and upward.

Technology has been the most powerful driver of productivity until recently. However, the recent period shows signs of "freezing." For the industry to show great momentum again, artificial intelligence and automation must move from pilot use to mass, everyday use in a multitude of professions and not just in purely technology companies.

The strategic goal, as Bell describes it, is clear: better real growth with sustained employment and increased hourly output. But it is “much easier said than done,” precisely because the pre-2008 “baseline” was inflated by unsustainable financial sector profits.

Labor market: weakness confirmed by multiple sources

In the latest labor market data, Bell sees continued cuts in the private sector. The data HMRC PAYE RTI (which incorporate the most recent revisions) show that the private sector has been in a “jobs recession” since the middle of last year. The same ONS notes that the RTI provides a more reliable picture of employees than the Labour Force Survey (LFS).

A breakdown of payrolls by key cyclical sectors confirms the weakness: professional services, construction, and retail are all down. The argument that the RTI is “overstating” because it does not include the self-employed does not seem to hold up, as the LFS records a decline in the self-employed in most cyclical sectors — with the exception of technology.

Market research agrees with the above: at KPMG/REC recruiters report a sharp increase in staff availability, often due to layoffs. The services PMI index records a “solid” reduction in staff since October 2024, due to sluggish demand and high costs. In manufacturing, cuts continue for a ninth month and are among the steepest since 2020, while in construction the staff decline has lasted for seven months, with hiring freezes and those leaving not being replaced.

Bell’s conclusion is sober but worrying: when official tax figures, LFS, PMI and recruiter surveys all say the same thing, then the probability of a recession is increased. The policy response, according to his reasoning, is not to squeeze employment, but to target productivity acceleration in “difficult” sectors (services, retail, health), the diffusion of technology across the economy and a stable labour cost framework that allows businesses to invest in capital and processes without massive job cuts.