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UK productivity growth has been in the doldrums for years. In November, the Office for Budget Responsibility finally gave up waiting for improvement and built long-term weakness into its official fiscal forecasts.
Dead on cue, the data has just begun to show tentative signs of a revival.
If the recent pick-up lasts, it could strengthen the UK’s prospects — boosting living standards, easing pressure on the public finances and giving the Bank of England more scope to cut interest rates.
But economists say the productivity improvement so far is largely the result of job cuts in low-wage sectors and it is far too soon to talk of a lasting rebound, which will hinge on growth in higher-value services.
What does the data show?
Although problems with official data cloud the picture, economists say 2025 was probably one of the strongest years for UK productivity growth since the global financial crisis of 2008.
Their forecasts indicate GDP growth of 1.4 per cent over the course of 2025. Meanwhile alternative measures of employment — including tax records and the Office for National Statistics’ workforce jobs survey — suggest headcount was flat or falling.
This points to annual growth in labour productivity of well above 1 per cent — more than double the average of 0.5 per cent since 2010 and above the OBR’s new forecast for trend productivity growth of 1 per cent.
The Bank of England will update its estimate of trend productivity growth, currently in line with the OBR’s reduced figures, next week.
What is driving the pick-up?
Economists differ on whether the latest data is promising or worrying because the main reason productivity has improved is low-paid jobs being cut.
These job losses have been centred on hospitality and retail, sectors that were especially hard hit by last year’s increases in national insurance and the minimum wage.
Job cuts in low-wage sectors push up the average output of the remaining workforce in the short term, but Michael Saunders, senior adviser at consultancy Oxford Economics, argued “this is not a route to sustained higher potential growth”.
He said the government’s policies are “removing lower paid people from the workforce”, leading to a lasting rise in unemployment and the fiscal burden, while “potential growth is no higher”.
Others are more optimistic. Bruna Skarica, chief UK economist at Morgan Stanley, argued that businesses cut headcount in 2025 — largely through slower hiring, rather than redundancies — because they had been overstaffed for several years following the pandemic.
“This is the flip side of labour hoarding,” she said, adding that retailers had also invested in automation in response to higher labour costs and were now starting to see the benefits.
Andrew Wishart, economist at Berenberg, said the UK could be “in the foothills” of a productivity revival, noting that the hospitality and retail sectors had maintained their share in UK GDP even as they slashed jobs.
Higher-value sectors such as tech and professional services were also producing more with fewer staff, he noted, perhaps marking “the beginnings of a boost from artificial intelligence”.
What is needed for a sustained pick-up in productivity?
Economists are now assessing whether the cyclical upswing in UK productivity can turn into a more sustained recovery, mirroring developments across the Atlantic.
In the US, productivity was almost 2 per cent higher than a year earlier in the third quarter — putting the growth rate close to postwar averages that few rich countries have matched since the 2008 global crisis.
This was driven by the combination of surging business investment in AI and weak hiring.
In the UK, a recent improvement in business investment is much more modest and concentrated in specific sectors such as utilities and tech. GDP growth in 2025 was largely supported by public spending rather than private-sector dynamism.
Analysts believe the UK will be relatively well placed to benefit as the rollout of AI gathers pace, however, because its economy is geared towards higher-value professional services where the productivity gains could be greatest.
Some gains from AI are already built into the OBR’s projections. Even as the watchdog downgraded its productivity forecasts in November, it said AI would start to lift the UK’s performance towards the end of the parliament, improving productivity growth by 0.2 percentage points.
Economists at the Resolution Foundation think-tank argue that job losses at failing “zombie” firms could bode well for the future, if they “begin to make room for more and better jobs to be created”.
But they admit, “we haven’t seen it yet” and Saunders remained sceptical. “If you kill off the zombies,” he said, “it’s not creative destruction. It’s just destruction.”