It’s not just in the UK that productivity growth has slowed. It has also done so in the US. Official figures next Thursday are likely to show that output per hour in the non-farm business sector has risen by just 1.1 per cent per year in the last five years. That’s only half the annual growth rate we saw in the 50 years before the financial crisis.
Almost all economists agree that this matters enormously, because it is productivity that ultimately determines how much an economy can grow. Paul Krugman’s quip has become a cliché: “Productivity isn't everything, but in the long run it is almost everything.”
Here, though, comes a surprise. There has been remarkably little correlation between productivity growth and share prices in the past. My chart plots five-year growth rates for both. It shows that while the two have sometimes moved together – such as when both did badly in the 1970s – they have often moved in different directions. The fastest growth in productivity on record (in the early 1960s) saw only moderate equity returns; productivity soared in the five years to 2004, but equities did badly; and of course the recent slowdown in productivity has seen shares do well. Since 1947, the correlation between productivity growth and five-yearly changes in the S&P 500 has been zero. For 10-year growth rates, it has only been 0.1.