UK productivity growth strengthens as private sector output improves
Britain’s economic outlook is showing early signs of improvement as private sector productivity rises after years of weak performance. The pickup is narrowing the gap with the U.S. and could support incomes and ease pressure on public finances if it is sustained.
Highlights
- Morgan Stanley analysis shows UK private sector productivity grew 1.8 per cent year-on-year in Q2, up from 1.2 per cent previously.
- Analysts attribute some of the productivity acceleration to increased AI adoption in sectors like information technology and business services.
- Stronger productivity data supports Chancellor John Healey ahead of October Budget and could help ease pressure on Britain's public finances.
Productivity gains point to a stronger outlook
As reported by Financial Times, analysis by Morgan Stanley of official data shows private sector productivity grows by 1.8 per cent in the second quarter from a year earlier, up from 1.2 per cent previously. The increase extends gains since 2024 and suggests the UK is starting to close part of its productivity gap with the U.S.The drivers of the improvement remain disputed, but some analysts link the trend to wider AI adoption in sectors such as information technology and business services. Bruna Skarica, an economist at Morgan Stanley, says that the longer the private sector records these levels of productivity growth, the more likely it is that the cyclical upswing has a longer-lasting structural component.
Skarica also says it is reasonable to ask whether the stronger post-Covid productivity trend seen in the U.S. is starting, with a delay, to feed through to the UK as AI adoption takes on a bigger role.
Budget implications and longer-term pressure points
The stronger figures provide support for Chancellor John Healey ahead of his October Budget, adding to the boost from solid second-quarter GDP data. A sustained rise in productivity would be significant for the government because it can lift incomes while helping to relieve some of the strain on Britain’s public finances.The recent acceleration follows a long period of weak productivity growth after the 2008 global financial crisis, a trend that has contributed to stagnant living standards and tighter fiscal conditions. Last year, the Office for Budget Responsibility cut its medium-term estimate of underlying productivity growth by 0.3 percentage points to 1 per cent.
Our earlier coverage of the UK’s improving private sector productivity trend highlighted a rise to 1.8% year-on-year in Q2, narrowing the gap with the U.S. We noted that economists remain split on whether the gains reflect broader AI adoption in services or a more cautious hiring backdrop that lifts output per worker, and we also flagged the potential budget and public-finance implications if the improvement proves durable.
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