A productive week

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A productive week


In the Autumn Budget last year, Philip Hammond, the UK Chancellor of the Exchequer, addressed the thorny issue of lacklustre UK productivity. Three months later, productivity has made some encouraging strides, building on the previous quarter’s improvement.

Data released by the Office of National Statistics (ONS) stated that output per hour (the main measure of labour productivity) increased by 0.8% in final quarter of last year. The recent improvement is identified by the green bar in the chart below; this follows on from the 0.9% increase in the previous quarter. Taken together, the second half of 2017 was stronger in productivity terms than any consecutive period of 2 back to back quarters since the financial crisis in 2008.

UK productivity (Quarter on Quarter%)

Source: Office for National Statistics, 22 February 2018

Improving UK productivity is important. It ensures competitiveness is maintained, and it is through enhanced competitiveness that economies generate wealth. When Mr Hammond addressed the issue of poor productivity last November in his Autumn Budget, he promised an extra £9bn to be spent on Research and Development so hopefully this will bear fruit in the years to come.


Employment data released by the ONS gave further insight into the jobs market.  Unemployment increased slightly by 0.1% over the last quarter of 2017. This equates to an extra 46,000 people out of work.  Today, the jobless rate remains low, at 4.4%, and only slightly higher than the 42 year low of 4.3% achieved last month.

People finding jobs revealed more about the outcome. The number of people employed grew by 88,000. This means that the pool of available labour supply expanded with population growth which helps explain why unemployment and employment can both rise at the same time. We have a situation of higher unemployment but more people in work. Therefore, politicians can pick and choose whatever statistic suits their argument!

Improvements in employment numbers coincide with average weekly earnings expanding by 2.5%. This improvement excludes bonuses in the fourth quarter of 2017 and is better than the 2.3% increase three months earlier.

One swallow doesn’t make a summer but the Bank of England is confident that the improvement in pay numbers signifies the start of an improving trend, with wages expected to outpace inflation (currently 3%). If correct this will lead to improving living standards.

Tax Receipts

Building on the good news in the labour market, the public sector (government) borrowed a lower than expected amount. Government borrowing fell to £37.7bn (highlighted by the green line in the chart below) in the first 10 months of this financial year. This is £7.2bn less than during the same period in 2016-17.

Income tax receipts are significantly stronger than expected and if the improvement is maintained the current projection for borrowing this fiscal year should fall to £38.4bn; compared with $45.8bn in the previous financial year.

The biggest factor was self-assessment income tax payments which came in at £12.88bn. Receipts from VAT, fuel, alcohol, tobacco duties and stamp duty on properties all showed an improvement.

Public Sector Net Borrowing

Source: Office for National Statistics, 22 February 2018

It did not take long for Philip Hammond to comment. He said this is “good economic news as we build an economy fit for the future”. With an annual UK deficit now less than £40bn, annual borrowing as a proportion of national income is just 2%, and at a level the government pledged to meet by 2020-21.

Although austerity is at an end, Mr Hammond is expected to maintain a tight grip on the purse strings. However, pressure will build for him to loosen them in the Spring Budget next month. In this regard the Office for Budget Responsibility, the fiscal watchdog, will be scrutinised to see if they consider that an upgrade to the UK economic outlook is appropriate. If this happens, Mr Hammond may be inclined to be more generous.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

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