Emeritus Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm.

ONS labour productivity data estimates that output per hour fell quarter-on-quarter by 0.6% in Q4 2025, highlighting how far the UK remains from resolving its long-standing productivity problem that is holding back real economic progress.

Output has largely stabilised while employment growth has slowed, allowing firms to extract more value from existing workforces rather than expanding headcount. This has lifted measured productivity at the margin, but it does not yet point to a structural improvement driven by higher investment, innovation or skills.

Performance across sectors remains uneven. Professional and business services continue to deliver incremental gains, while construction and manufacturing have struggled for a decade to improve efficiency amid weak demand and delayed capital spending. Public sector productivity remains under strain, reflecting capacity pressures and staffing challenges.

AI will have an increasingly important impact on productivity in the coming years, but it remains too early for the effects of its adoption to have any significant impact on productivity. We can expect to see AI eventually lead to productivity gains, but businesses and policymakers must be ready to deal with the corresponding unemployment it will cause.

From an economic perspective, current productivity growth is insufficient. It helps contain inflationary pressure and allows real wages to rise without eroding competitiveness, contributing to a more stable outlook. However, low productivity levels are limiting the economy’s potential growth rate and constraining improvements in living standards.

This leads to the central question for policymakers and business leaders alike: will the UK settle into a low-growth equilibrium where productivity improvements remain marginal?

For businesses, the answer depends on confidence — in demand, policy stability and financing conditions. A cut to interest rates when the Monetary Policy Committee meets next in March will certainly do no harm to business confidence. For government, it hinges on whether policies can encourage capital investment, skills development and innovation at scale. Without progress on these fronts, productivity gains are likely to remain incremental rather than transformative.