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Fear of inflationary pressure as ONS reports rise

Mark Carneys guidance has triggered many debates. Picture: Getty

Mark Carneys guidance has triggered many debates. Picture: Getty

  • by SCOTT REID
 

Productivity across Britain has risen for the first time in two years, in a further sign that the economic recovery may be gaining traction.

Official data yesterday also revealed a modest rise in output from the UK’s dominant service sector.

The Office for National Statistics (ONS) said productivity in terms of output per hour worked rose 0.5 per cent in the second quarter – the first quarterly increase since the second quarter of 2011.

Trends in productivity across the economy have taken on particular importance for the path of interest rates since the Bank of England’s “forward guidance” pledge last month to keep borrowing costs at their record low level while unemployment remains above 7 per cent.

The central bank thinks workers will become more productive as the economy recovers, reducing the need for more hiring and delaying the fall in joblessness to the 7 per cent threshold till at least late 2016.

However, some economists argue that productivity took a permanent hit after the financial crisis and reckon unemployment will fall much faster, potentially pushing up inflation.

The ONS data came as the pound received a boost after central bank governor Mark Carney signalled there was no case for more quantitative easing.

He told the Yorkshire Post, part of the Johnston Press stable of newspapers that includes The Scotsman, that more monetary stimulus was still an option but that in his view there was no current need for additional bond buying, given that the UK recovery has “strengthened and broadened”.

Howard Archer, chief UK economist at IHS Global Insight, noted that while productivity had gathered pace during the quarter, output per hour worked was still down 0.4 per cent year-on-year.

He said: “The real test on productivity will not come until the UK has seen an extended period of at least reasonable growth.”

Service sector output rose 0.2 per cent in July, compared with the previous month, according to the ONS.

 

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