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UK productivity ‘abysmal’—but economy growing well

U.K. workers are still far less productive than before the financial crisis of six years ago even though the country's economic recovery is "entrenched", a leading think tank said on Tuesday.

Simon Dawson | Bloomberg via Getty Images

In a quarterly report, the National Institute of Economic and Social Research (NIESR) said labor productivity—a measure of the amount of goods and services produced by one hour of labor—was still around 4.5 percent below the pre-crisis peak of 2007.

"Productivity performance, therefore, remains abysmal," said NIESR in the report, which was published on Tuesday.

The Institute forecast that pre-crisis productivity levels would be regained, but not before the latter half of 2017.

"Given the continuing puzzle about the causes of poor productivity performance, large uncertainties remain," it said.

NIESR economic forecast for the UK

Labor productivity growth in the U.K. has been particularly weak since the start of the global financial crisis. Reasons remain unclear, and economists, including those at the Bank of England, refer to the "productivity puzzle".

Despite the "puzzle", U.K. economic growth has been 0.5 percent or more per quarter for the last six consecutive quarters—nearly twice the rate seen between 2010 and 2012. The labor market continues to improve, with total employment now more than 4 percent higher than it was at the start of 2008.

"The fall in labor productivity during the recent recession has been larger than in any other post-war recession and the recovery has been more protracted than previous experiences," said the Bank of England its second quarter bulletin.

"Although measurement issues may explain some part of the shortfall in productivity relative to a continuation of its pre-crisis trend, a large part still remains unexplained."

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The Bank hypothesized that trend growth in productivity had started falling before the crisis, perhaps due to slowing North Sea extraction output, which the U.K. relies on for much of its oil and gas.

In addition, it suggested that productivity growth in financial services could have become "persistently lower", following the sector's rapid growth prior to 2007.

The central bank said productivity might spontaneously improve in the later stages of the economic recovery. For example, companies could switch staff from generating business to producing output and increased R&D efforts could mean companies bring to market new goods and services, increasing their measured productivity.

Productivity growth could also pick up if barriers to the reallocation of labor and capital start to wane, due to a reduction in macroeconomic uncertainty or an improvement in credit conditions.

"These are good reasons to be optimistic about the outlook for U.K. productivity growth," the Bank said.

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NIESR sees the U.K. economy growing 3.0 percent this year, up from 1.7 percent in 2013. This is slightly less than the 3.2 percent forecast by the International Monetary Fund.

—By CNBC's Katy Barnato

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