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UK productivity puzzle

The UK’s productivity performance since the recession has been unusual, both compared with other countries and with past slumps. The previous recession saw a much bigger fall in output than previous contractions and a painfully slower recovery. But as the fall in employment was relatively small, productivity growth in the short-term has been very weak.

The source of this weakness has important implications for monetary policy, because along with labour supply, it affects the underlying capacity of the economy to grow and therefore the level of potential GDP. It also matters for fiscal policy since the output gap determines how much of the current budget deficit is cyclical rather than structural.

The UK’s productivity was 11 percentage points lower than the average of the other G7 in 2011, and fell the most sharply of all the G7 countries due to the financial crisis.