UK Labor Productivity Flat in Q2 Amid Surge in EU Workforce

Rapid expansion in the UK's job market, and a surge in hiring, particularly, from the EU, resulted in productivity losing momentum, adding to the post-Brexit concern of a broader economic slowdown.

Kristian Rouz — Productivity figures marred the short-term economic outlook for the Brexit-shaken United Kingdom amidst the expansion in the labor market, featuring a massive influx of workforce from the EU nations, primarily, from Eastern Europe. With productivity gains subdued, the international competitiveness of the British economy has gained some port-Brexit momentum due to currency devaluation and shock-resilience in manufacturing. Nonetheless, weak productivity gains amidst the uncertainty in the post-Brexit adjustments in immigration policies have stirred concerns of economic expansion during the period of separation from the EU, which might take several upcoming years.

According to labor market data, released by the Office for National Statistics (ONS) on Wednesday, UK productivity, estimated as worker's hourly output, gained 0.5 percent in 2Q16, amidst the solid gains in GDP growth and expansion in the labor market. Generally falling in line with a similar trend in the US, where productivity has demonstrated feeble dynamics for the past three quarters, the UK's labor efficiency might point at brewing systemic trouble in the midst of the nation's job market.

"Because employment grew more rapidly than total hours worked in the second quarter, productivity growth on an output per worker basis was lower." the ONS said. "Productivity growth has been subdued since the (2008) downturn and has recovered more slowly than following previous downturns."

Indeed, the UK's employment level hit its record highest in Q2, with 74.5 percent of workforce on payroll, whilst jobless rate dropped to 4.9 percent. Average weekly earnings gained 2.4 percent (with bonuses), or 2.3 percent (bonuses excluded) year-on-year.

However, the faltering productivity and post-Brexit uncertainty might result in a slowdown in gains in salaries and wages.

"The weakness of recent surveys-the permanent staff salaries balance of the REC Report on Jobs Survey fell to its lowest level since May 2013 in July-indicates that wage growth will moderate soon," Samuel Tombs of the UK-based independent economics think tank Pantheon Macroeconomics said. "Nonetheless, with productivity growth likely to slow too and non-wage labor costs set to rise sharply, firms' cost pressures will remain intense. Inflation therefore will continue to pick up, despite the economy's slowdown."

Labor market tightening is largely expected as one of Brexit's consequences. However, there is rife uncertainly among the observers. One the one hand, unclear policy prospects and Brexit's effects to the economy might result in companies slowing their recruiting efforts. On the other hand, large amounts of the EU workforce might leave the UK following the referendum.

The immediate reasons behind the weakening productivity stem from the massive short-term expansion in the labor market and gains in salaries, whilst weak inflation and subsequent lack of rife demand for the UK's goods and services might have hindered output.

The "productivity puzzle" is among the key determinants to the "growing sense of uncertainty in markets about the fundamentals upon which future prosperity will be built," Mark Carney, governor of the Bank of England, commented on the matter.