LONDON
Britain's productivity growth has finally broken free from a 17-year drag that began with the 2008 financial crisis and deepened after COVID-19, according to new data from the Resolution Foundation released Monday.
Output per hour grew at an average annual rate of 1.1 percent over the two years ending June 2026—a reversal from the 0.7 percent annual decline in the prior two-year period. This marks the sharpest turnaround since the late 2010s, when productivity averaged 0.7 percent annually.
The improvement carries real implications for the Bank of England's inflation regime and gilt dynamics. Higher productivity growth reduces structural inflation risk and eases fiscal pressure from an aging population and rising defense spending. If sustained, it lengthens the runway for real-rate normalization without wage-driven repricing—a material consideration for the long end of the curve.
Official statistics had masked this improvement. The Office for National Statistics (ONS) relied on a post-pandemic survey with sharply lower response rates until June, when it shifted to tax-based employment data. The switch offers more accurate headcounts but strips out hours-worked granularity, forcing private economists to fill the gap.
Bruna Skarica, chief UK economist at Morgan Stanley, estimates private-sector productivity is running at 1.8 percent annually—approaching pre-2008 crisis norms. She notes the pattern mirrors U.S. productivity acceleration, which began roughly 12 months earlier and has held strong for three years.
The parallel is structurally meaningful. Both economies rely heavily on services—an area where artificial intelligence could unlock measurable efficiency gains. Skarica draws a parallel to the 1990s computer revolution, when widespread office automation drove a productivity wave.
Yet the AI driver remains unproven. Robert Wood, chief UK economist at Pantheon Macroeconomics, found scant evidence of broad-based headcount reduction tied to AI—only pockets like junior software development show staffing pressure. The Resolution Foundation noted the productivity pickup was broad-based across sectors, making it harder to isolate a single cause and harder to project confidence in durability.
That durability question matters for gilts. A productivity gain that sticks supports higher potential growth and lower fiscal sustainability risk. One that fades leaves inflation expectations unanchored and duration risk intact. The market will demand clarity on whether this is a structural shift or mean reversion from pandemic-era collapse.
