From Martin Wolf,
Productivity is not everything, but in the long run it is almost everything. This truth, enunciated by the Nobel laureate Paul Krugman, has just bitten George Osborne, the UK chancellor. But the prospects for productivity are not important just to Mr Osborne. They are the most important uncertainty affecting the economic prospects of the British people. Is it reasonable to expect a return to buoyant pre-crisis productivity growth? Will productivity continue to stagnate? Or will it end up somewhere in between?
One explanation might be the impact of the financial crisis on credit. But, as the financial sector heals, this is less persuasive. Another explanation must be the post-crisis collapse in business investment, to a low of 8.1 per cent of gross domestic product, in real terms, in the fourth quarter of 2009. But this has since recovered. It would be good if business investment were still higher. But it is hard to believe that low investment continues to explain the persistent productivity disappointments. Again, GDP might be mismeasured. But it is difficult to understand why such mismeasurement suddenly jumped after 2008. Maybe growth of GDP and productivity is higher than measured. But that should also have been true before 2008.
The UK economy is a special case because of its very large services sector, which is difficult to account for. Within services is the financial sector, which adds up to 7.6% in 2012 of gross value added. The measure of productivity in the financial sector is also challenging and has many limitations.
Much more can be said about the challenges in measuring productivity, but for now here is a chart which highlights the UK particular circumstances: