Why the UK Productivity Problem Is Still Holding Back Growth in 2025
Despite falling inflation and record employment, the UK’s productivity growth remains weak. Output per worker is barely above pre-pandemic levels — and that could keep wages and living standards stuck.
The UK economy has stabilised after several turbulent years, with inflation falling and the labour market holding up better than expected. Yet one stubborn problem remains: productivity. Despite improvements elsewhere, Britain continues to lag behind other major economies in output per worker, threatening long-term wage growth and competitiveness.
The Numbers Behind the Problem
According to the Office for National Statistics (ONS), UK labour productivity — measured as output per hour worked — was 1.5% higher than its pre-pandemic level (Q4 2019) by mid-2025. However, it actually fell 0.8% year-on-year in Q2 2025.
Source: ONS – UK Productivity April to June 2025
The ONS notes that while total employment is near record levels, much of the post-pandemic job growth has been in lower-productivity sectors such as hospitality, health, and social care. In contrast, high-value sectors like information technology and manufacturing have seen slower expansion.
How the UK Compares Internationally
The International Monetary Fund (IMF) estimates that the UK’s productivity is roughly 16% below the G7 average, and around 30% lower than the United States. Germany, France, and the Netherlands all record higher output per hour worked.
Source: IMF – World Economic Outlook 2025 Dataset
The UK’s productivity stagnation predates recent shocks. Between 2008 and 2019, productivity growth averaged just 0.3% per year — compared to 2% in the decade before the global financial crisis.
Why Productivity Is Stuck
Economists point to several overlapping causes:
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Low Business Investment – UK business investment as a share of GDP has been among the lowest in the G7 for more than a decade, limiting access to new technology and capital equipment.
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Skills and Training Gaps – The UK’s workforce participation is high, but technical skills and adult training rates lag behind other advanced economies. According to the OECD, only 31% of UK workers participate in ongoing professional development annually, compared to 44% in Germany.
Source: OECD – Skills Outlook 2025
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Regional Imbalance – Productivity in London is more than 50% higher than the UK average, while cities in the North and Midlands trail behind. A 2025 report by the Centre for Cities found that nearly half of UK cities have productivity levels below those of Eastern European capitals.
Source: Centre for Cities – How Productive Are the UK’s Big Cities
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Weak Infrastructure and Planning Bottlenecks – Projects like HS2 delays and local transport underfunding have restricted labour mobility and supply chain efficiency.
Why It Matters for Wages
Productivity is the foundation of sustainable wage growth. Without improvements in how efficiently workers produce goods and services, pay rises risk being eroded by inflation or passed on as higher prices.
The Bank of England highlighted in its May 2025 Monetary Policy Report that weak productivity growth limits the economy’s “non-inflationary growth potential” — meaning that wage increases can trigger inflation more easily when productivity is stagnant.
Source: Bank of England – Monetary Policy Report May 2025
In real terms, this explains why UK wage growth has struggled to keep up with living costs over the past decade, even when employment has been high.
Can the UK Fix It
Policymakers and economists generally agree on the broad solutions:
- Encourage Business Investment – Through tax incentives and stable industrial policy to reduce uncertainty.
- Boost Technical Education – Expanding vocational training and apprenticeships beyond traditional trades.
- Support Regional Growth – Improving transport and digital infrastructure outside the South East.
- Adopt Automation Responsibly – Using AI and robotics to enhance output per worker, not just cut jobs.
The government’s 2025 Autumn Statement pledged £3 billion over three years for “Productivity Partnerships” — local programmes designed to boost business innovation and workforce training — but economists say delivery will be key.
Source: HM Treasury – Autumn Statement 2025 Overview
The Bottom Line
The UK’s productivity problem is not a new crisis — it’s a slow-burning one. Even as inflation eases and the job market holds steady, the country’s long-term prosperity depends on breaking this cycle of weak productivity growth. Without it, wages, competitiveness, and fiscal stability will remain under pressure long after the economic shocks of the 2020s fade.
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