Is UK productivity growth low? A historical and cross-country perspective – Bank Underground

Sophie Piton and Fabrizio Cadamagnani

A lot has been written about UK productivity and how weak it’s been in recent years. This post assesses UK productivity trends in a historical and cross-country perspective. Productivity growth has been weak across G7 economies over the past two decades, reflecting the end of the information and communications technology (ICT) revolution and the flattening gains from globalisation. The slowdown was particularly large in the UK, mainly because it experienced a larger decline in the share of manufacturing than peers and then because of the impact of Brexit. In recent years, US productivity growth has been accelerating thanks to tech, offering some optimism for the future of UK productivity.

Productivity growth is of key interest to policymakers including the Monetary Policy Committee as it determines the ‘speed limit’ of the economy in the short/medium run and is the primary driver of living standards in the long run. Since the global financial crisis (GFC), the annual growth rate of UK labour productivity (output per hour) has been lower than in the previous century (Chart 1). Productivity growth has been weak across advanced economies, but the UK has been below the US and EA19 average, averaging 0.5% for the market sector over 2008 to 2025 (Table A). The US has averaged 1.7%, well above peers, partly driven by strong productivity growth since Covid.

Table A: Labour productivity (output per hour) annual growth rate for the market sector, annual average

Note: ‘Business sector’ is the business sector in the US, the market sector in the UK and the total economy excluding mostly public sectors and real estate in Europe.

Sources: Authors’ calculations using BLS, Eurostat and Office for National Statistics (ONS).

Chart 1: Output per hour for the total economy, annual growth rate

Source: Authors’ calculations using the Long-Term Productivity Database, 2026 edition.

The ICT revolution and the high productivity growth of the 1990s/2000s

The manufacturing and tech services sectors experienced an exceptional transformation in the 1990s and early 2000s with unprecedented productivity gains (Chart 2 panel A). This transformation reflects the adoption of new general-purpose technologies following the ICT revolution (diffusion of computers, internet, and enterprise software). In addition, strong global competition forced the exit of less productive manufacturing firms in the UK and other advanced economies, and incentivised surviving firms to offshore their low-productive activities (this reduced the manufacturing sector’s share of employment in all G7 economies – Chart 2 panel B). Overall, the result was very high growth of labour productivity in both manufacturing and tech services, which lifted aggregate productivity growth.

Chart 2: The exceptional performance of the manufacturing sector in the decade before the GFC

Panel A: UK annual labour productivity growth (five-year moving average), 1970–2024

Panel B: Share of manufacturing in total employment, per cent

Note: Labour productivity is output per hour.

Sources: Authors’ calculations using ONS MFP 2025 release (panel A) and STAN 2025 release (panel B).

The decline in productivity growth from the mid-2000s

There are discussions as to when the productivity decline started, the latest evidence suggesting it started as early as the mid-2000s, before the GFC. This decline is common across all G7 economies, reflecting weak total factor productivity (TFP) more than weak capital deepening. The literature suggests it marks the end of the ICT revolution but also reflects the flattening of the gains from globalisation.

While a weakening of productivity growth could be expected after firms upgraded their production processes and productivity reached much higher levels, researchers have found the scale of this slowing puzzling given the continuing high investment in R&D in these sectors after the GFC (for example Lashkari and Pearce (2024) or Goldin et al (2024)). Some of the explanations proposed for the productivity slowdown in the US point to IT innovation leading to a decline in business dynamism, in particular in the manufacturing sector, and an increase in sales concentration among a few large firms; this high level of concentration discourages innovation and results in a slowdown in productivity growth over the long run. However, while the evidence on the decline in business dynamism is stark in the US, the evidence is more mixed across the Atlantic and in the UK in particular (for example Gutierrez and Piton (2020)), where productivity slowed down the most.

Even if productivity growth in manufacturing declined materially (‘within effect’), it was still above the average of the other sectors (Chart 2 panel A). However, the share of the manufacturing sector in GDP also declined substantially (‘between effect’). These two effects meant that the contribution of manufacturing to total economy productivity declined significantly. As a result, in accounting terms, manufacturing is the largest contributor to the productivity slowdown across most G7 economies (Chart 3 panel A).

Chart 3: The role of manufacturing in the UK productivity slowdown

Panel A: Total productivity slowdown (2010–19 versus 1998–07, per cent) and manufacturing sector contribution (within + between effects, percentage points)

Panel B: UK annual average productivity growth (market sector, per cent) and sector contributions (percentage points)

Sources: Authors’ calculations using STAN 2025 release (panel A) and ONS MFP 2025 release (panel B).

* US productivity data by industry in STAN starts in 1999. Panel A shows the contribution of manufacturing, both its ‘within’ and ‘between’ effects, to total economy productivity growth. Panel B shows within-industry contributions using the Tang-Wang methodology for market sector only. Productivity is output per hour.

Measured UK market-sector productivity growth was 0.3% per year on average over 2008–19, very weak both in absolute terms and relative to other G7 economies (Chart 1 and Table A). There is a large academic literature on the reasons for poor UK performance and still no consensus. We highlight two key drivers.

First, the role of manufacturing. Even though in the 1970s the UK had the largest manufacturing share among G7 countries, the size of the sector declined by more than peers and by the time of the GFC the manufacturing share was the lowest in the G7 group (Chart 2 panel B). A lower manufacturing share helps to explain the UK’s lower aggregate productivity growth, given that productivity is higher in manufacturing than in most other sectors.  

Second, the UK has been affected by measurement issues that have depressed its measured productivity relative to peer countries. The publication of the ONS Bluebook 2021, which introduced important revisions to historical data, and most importantly ‘double deflation’, significantly reduced the measured UK productivity slowdown since the GFC, so the UK is within the G7 range now.  And a revision to the measurement of hours worked, as the ONS moves from a ‘direct’ method to a ‘component’ method to minimise the bias from the secular decline in Labour Force Survey response rates, is likely to lead to further upward revisions to UK productivity growth when implemented – initial estimates suggest a +0.4 percentage points increase in the average annual growth rate over 2008–19.

Productivity developments since the Covid pandemic

Since the pandemic (2020–25), UK market-sector labour productivity has grown at an average of 0.7% per year, significantly lower than 2.2% in the US but slightly higher than the European average of 0.6% (Table A).

The recent supply shocks and data measurement issues challenge the interpretation of UK productivity trends as well as international comparisons in recent years. The pandemic drove large compositional effects, reflecting the fact that the sectors most hit by lockdowns were those with the lowest labour productivity. When focusing on ‘within-industry’ productivity growth, and so abstracting from these compositional effects, we can see that UK labour productivity growth was resilient through Covid and then started to decline in 2023 as the economy slowed down. The timing differs depending on the data source for the measure of hours, but all measures give similar average growth rates for UK productivity over the 2020–25 period.

Brexit has been a key headwind to UK productivity. The Bank of England’s central estimate is that Brexit will leave the level of potential productivity in the UK 3¼% lower than otherwise by the end of 2028, with the effect weighting on productivity growth in the transition to this lower level. There is however still a lot of uncertainty on the magnitude and timing of the Brexit impact. New research suggests larger impacts on trade in services than assumed so far. In any case, it’s likely that in the absence of Brexit UK productivity growth would have been materially higher than in euro area countries over the past six years.

What about the UK productivity level?

Comparing levels of labour productivity is a challenging task and relies on comparable measures of output, hours worked and price levels (comparisons are made in purchasing power parity, or ‘PPP’, terms to account for differences in the cost of living). The ONS publishes a range of estimates using different methods to compute hours worked to compare G7 economies, which suggests that in 2019 UK labour productivity was c.20% lower than US productivity.

Allas and Zenghelis (2025) link the low level of UK productivity relative to its leading peers to the cumulative effect of weak investment rates over several decades. Chart 6 panel A, shows that the UK business investment-to-GDP ratio has been lower than in other G7 economies since the turn of the century. The decline of the manufacturing share of the UK economy is a key reason for this – the UK investment-to-GDP ratio excluding manufacturing has been close to the US and G7 average (Chart 6 panel B).  Some of the relative weakness in UK investment rates in other sectors could also be due to measurement issues, as the UK specialises in industries where intangible investment matters the most and these assets are harder to capture.

Chart 6: The role of manufacturing in the UK investment-to-GDP ratio

Panel A: Market sector investment share in GDP, 1995–2021

Panel B: Market excluding manufacturing sector investment share in GDP, 1995–2021

Sources: Authors’ calculations using EU KLEMS 2025 release.

Tech, the US exception and prospects for UK productivity growth

There’s an active debate on ‘Eurosclerosis’, pointing to the persistent gap in productivity growth between US and European countries in recent decades (Table A). It’s however unclear whether this has translated into a relative improvement in living standards for the US over this period.

The Draghi report on EU competitiveness (2024) highlighted this divergence in productivity growth pointing to the important role of the US tech sector. Indeed, Chart 7 shows that the contribution of IT and other information services (including AI companies) to total US productivity growth is larger than in European economies and the gap has been increasing. In the US, this sector is less than 4% of total output but has contributed 12% to total productivity growth in the last three years. While some of this could reflect early gains from AI, it also reflects strong automation/digitalisation investment following the pandemic. This dynamism in tech is also reflected in strong business creation in the US tech sector not seen in UK data.

Chart 7: Contribution of IT and other information services to total economy annual labour productivity (output per hour) growth, three-year moving averages, percentage points

Sources: Authors’ calculations using STAN 2025 release and ONS February 2026 productivity by division release for the UK.

* EU3 include France, Germany and Italy. IT and other information services correspond to sector J62_63.

Yet, the UK also has a strong tech sector. The contribution of IT and other information services to total economy annual labour productivity growth is larger in the UK than in other European economies (Chart 7), and the main contributor to UK productivity growth in the recent period (Chart 3 panel B).  Cross-country evidence suggests that the UK is just behind the US in terms of AI adoption. There are reasons to think AI adoption may materially and persistently lift UK productivity growth, although the timing and magnitude of AI impacts are highly uncertain.

To conclude, while the slowdown in productivity growth in the past two decades was in large part driven by the end of the general-purpose ICT revolution, there is hope that recent developments in AI may mark the start of a new general-purpose revolution. This offers some optimism for the future of UK productivity, although there is still a lot of uncertainty on the nature and timing of the change that AI is going to bring.

Sophie Piton and Fabrizio Cadamagnani work in the Bank’s Structural Economics Division.

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