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Economy: Business analysis: Slump in productivity may force interest rate rise, says Larry Elliott: Find more expert analysis on our blogs at =

July 2, 2014

Britain's manufacturing is humming; output is strong and order books are full to bursting.

One risk to this recovery is the strength of the pound. An even bigger threat comes from the weakness of productivity. The latest data from the Office for National Statistics shows that whether measured in terms of output per worker or output per hour, productivity fell in the first three months of 2014. On either measure it is more than 4% down on its pre-recession peak, a woeful performance given that the long-term trend is for productivity to increase by about 2% a year.

Productivity matters because it is by getting more efficient that living standards increase. There are two schools of thought about the UK, one optimistic and one pessimistic. The upbeat view says that most of the recent fall in productivity has been caused by a combination of under-reporting of activity and of cyclical factors. This pick-up in cyclical productivity is long overdue. The Bank of England wants to believe that productivity will start to improve as investment starts to kick in. But its patience is not inexhaustible. Interest rates will rise if productivity does not show signs of improving fast.

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Source: Guardian (UK)

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