Dip in UK productivity growth adds to interest rate dilemma

The combination of stronger earnings growth and falling productivity is adding to inflationary pressures, and could complicate the next interest rate decision from the Bank of England’s Monetary Policy Committee, according to Dr John Philpott, Chief Economist at the Chartered Institute of Personnel and Development.

Dr Philpott, said:
The jump in the annual rate of growth in unit wage costs, reported in official figures for the fourth quarter of 2004 published today by the Office for National Statistics, represents a worrying increase in inflationary pressure in the UK labour market.

The rise - caused by a combination of stronger earnings growth and a dip in productivity growth - will further complicate next month’s decision on interest rates by the Bank of England’s Monetary Policy Committee. Although better than expected figures for CPI inflation for February - released yesterday - appeared to reduce the prospect of a further quarter point rise in interest rates, today’s figures call that optimism into question.

Of particular concern is a dip in productivity growth and rising unit wage costs in the manufacturing sector. Although weaker productivity growth in the economy as a whole can be attributed to relatively poor measured performance in the public sector, a loss of competitiveness in the manufacturing sector could have a knock on effect on UK trade performance in a period when exports are expected to be a relatively more important driver of overall economic growth.

Today’s figures are also a warning siren to employers in all sectors of the need to take a firm stand in coming wage negotiations as well as intensifying efforts to boost productivity.