Productivity boost for UK's ailing economy

Medium-term prospects for the British economy may have improvedafter a report today pointed to faster productivity growth in threequarters of the UK's "regions".

Research by the Centre for Economics and Business Research (CEBR)suggests that productivity, or output per worker, is set toaccelerate in nine out of the 12 regions between now and 2015compared with 1998-2008.

The biggest increase in productivity growth is forecast forWales, rising from an annual rate of just 0.6 per cent to 1.5 percent. Other regions where a substantial improvement is expectedinclude Yorkshire and Humberside and the West Midlands.

Less significant rises are forecast for Scotland, where outputgrowth is predicted to nudge up from an already robust 1.3 per centto 1.4 per cent, Northern Ireland and the north-east of England.

Meanwhile, productivity growth in London is likely to be slowerduring the current recovery than between 1998-2008 as the financialservices sector is less effective in driving the economy forward.

Economists argue that the overall boost to productivity meansthat costs can be spread better and should allow for services to becheaper than they otherwise would be. This, together with moreprofitable businesses, should allow growth to accelerate in lateryears.

News of an improved outlook for UK GDP could ease some of thepressure on Bank of England policymakers as they convene this weekfor their latest rate-setting meeting.

Members of the bank's monetary policy committee have been urgedby business leaders to hold their nerve on interest rates, despitecontinued inflationary pressures in the UK economy.

While a hike in borrowing costs could help bring inflation downit may also threaten the economic recovery, which had been lookinguncertain after GDP slumped by 0.5 per cent in the final quarter of2010.

Owen James, one of the authors of today's "Regional Prospects"report and an economist at CEBR, said: "We still cannot make theoutlook for those parts of the economy which depend heavily onpublic spending look good for the period from 2011-15.

"But hopefully this is a transitional period and the improvementsin productivity growth that we expect will be the underpinnings of abetter outlook for employment beyond 2015."

Scott Corfe, co-author of the report, added: "One of the toughaspects of the public spending cuts is that they will hit employmentharder in those parts of the economy more dependent on the publicsector.

"But part of the silver lining is likely to be a faster rate ofproductivity growth - and it is productivity that underpins long-term economic performance.

"Also, it is likely to be easier for entrepreneurs in a region togrow their business now than in the 1980s when we last had highunemployment, because in those days entrepreneurs in regions thatwere transforming themselves mainly had to depend on localcustomers.

"Today with the internet, they do not have to depend on localcustomers to anything like the same extent"