Interest rate hikes in the UK could be on the way from May onwards after the strongest productivity growth since the financial crisis.

In the last quarter of 2017, output per hour rose 0.8% according to statistics agency Office for National Statistics. This was supported by a fall in total hours worked and 0.5% increase in the value of goods produced.

This marks the second consecutive quarter of growth in output per hour following a 0.9% rise in the previous quarter. It is also the second highest rate of growth since the second quarter of 2011.

‘As a consequence, output per hour growth in the second half of 2017 was stronger than any two consecutive quarters since the economic downturn,’ comments the statistics agency.

It should be noted that over a longer period UK productivity growth has been relatively weak since the financial crisis.

PRODUCTIVITY BOOST MATCHED BY WAGE GROWTH

Better productivity – even in the short-term – is also being accompanied by an increase in real wages.

PriceWaterhouseCoopers chief economist John Hawksworth argues average earnings have been subdued over the last few years due to relatively lower earnings growth in high skilled occupations.

But now wage growth appears to be accelerating, rising from 2.3% to 2.5% between October and December 2017, when bonuses are excluded. Real earnings are effectively still falling with inflation running higher than the Bank of England’s 2% target at 3%.

In a bid to control high inflation, the Bank of England could boost interest rates from the current 0.5% faster than previously anticipated.

Analysts have pencilled in two hikes for 2018 with the first expected in May. The speculation has been supported by the Bank of England hinting in February that interest rate rises could accelerate if the economy remains on track.

HIGHER UNEMPLOYMENT NOT A CONCERN YET

This improvement in productivity and wage data should not necessarily be overshadowed by a surprise rise in UK unemployment.

In the last quarter of 2017, unemployment increased by 46,000 to 4.4%, driven by more people looking for work and being classified as unemployed.

‘There was an unexpected rise in unemployment between the third and fourth quarters of 2017, but closer inspection suggests this is not a sign of labour market weakness as it was also accompanied by a healthy rise in total employment,’ says  Hawksworth. (LMJ)

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