Market Insight - December 2015
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Up, Up and Away
Productivity is the key to economic recovery.

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Another sign that the economy is picking up comes from the latest numbers on UK productivity. It might seem like a boring statistic, but productivity growth is essential for economic growth and a wealthier country. High productivity growth simply means that the economy is working more efficiently, putting fewer hours of work in to get the same amount of output out. And it’s been absent for too long.

During the recession, unemployment didn’t rise anywhere near as much as was expected and that really helped the housing market. With people staying in work they could still pay their mortgage and rent and that helped to support the market during the darkest times. But with the same numbers of people in work and output falling, productivity fell too.

With low productivity came low wage growth, lower demand and slow economic growth – all hindrances to a healthy housing market.

Now at last it’s picking up and is even faster than Germany which has always fared well on efficiency. The OECD expect UK productivity growth to continue to outstrip other developed countries. With a more efficient economy, confidence grows and investment follows, which helps the wheels turn faster.

The trick is to get the balance right though. As productivity increases, so do profits and wages, but if wages grow too quickly that sets alarm bells ringing about inflation. This is one of the most important indicators for the Bank of England in making decisions on interest rates. Labour costs are 2.2 per cent higher than a year ago.

That’s certainly not enough to cause a move in rates yet, especially as wage growth has been low for so long, but even with high productivity growth, if wages grow too quickly that’s a signal that a rise in rates won’t be far behind.

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