Growing UK-US productivity divide driven by far more than shale gas and ‘magnificent seven’

Britain’s already dire productivity record has worsened in the 2020s, in sharp contrast to the US where it has accelerated since 2019. But while this exceptional US performance has been attributed to tech companies and shale gas, there are wider drivers of the UK-US productivity gap that Britain can learn from, according to new Resolution Foundation research published today (Tuesday).

Britain’s productivity record is going in the wrong direction. Growth in GDP per hour slumped to just 0.6 per cent a year during the 2010s, the worst of any G7 economy bar Italy, and has fallen further during the 2020s, to just 0.4 per cent on the official ONS measure.

Worse still, the Foundation’s productivity estimate – based on the more reliable ONS Workforce Jobs survey and HMRC payroll data – suggests it has actually fallen by 0.5 per cent between 2019 and 2024. Prior to the pandemic, this would be the second biggest five-year collapse in output per hour since comparable data began in the 1970s, beaten only by the financial crisis period.

Much attention has been paid to declining public services productivity in recent years, but Britain’s issues are more deep-rooted. The report finds that since 2019 productivity has fallen in 13 sectors that account for nearly two-thirds of UK output.

In contrast, US productivity has accelerated – from a worrying 1 per cent in the 2010s to a respectable 1.9 per cent growth since 2019 – putting it in a league of its own among G7 economies.

The drivers of this recent widening of the UK-US productivity gap hold important lessons for UK policy makers as they seek a long overdue return to productivity-based living standards gains across Britain, says the Foundation.

One factor has been the US’ continuing oil and gas boom, while UK output has shrunk. Despite representing less than two per cent of output in both economies, the diverging performance of extractive industries accounts for a sixth (16 per cent) of the widening UK-US productivity gap since 2019.

Another prominent area of US exceptionalism has been its ‘magnificent seven’ tech companies (Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Tesla).

But while these tech production companies have driven a productivity wedge between the UK and US information and communication sectors – accounting for a further 8 per cent of the total UK-US productivity gap – tech usage has played a bigger role in explaining the widening output gap.

The biggest driver of diverging performance comes from the Professional, scientific and technical services sector – accounting for 17 per cent of the UK-US productivity gap since 2019.

The UK should worry less about finding its own Meta and worry more that UK firms have increased investment in software by just 17 per cent since the pandemic compared to 42 per cent in the US, says the author.

As well as increasing its capital stock, Britain should also address its alarming firm fertility rate.

While both countries had similar company birth rates (of around 3 per cent per quarter) prior to the pandemic, the US has since increased to 3.6 per cent in 2024, the UK has fallen to 2.6 per cent – highlighting a worrying decline in British dynamism.

The Government can learn from recent US success as part of their efforts to encourage a UK productivity turnaround. Extending full expensing to software would boost productivity in services-sector firms, while reforming non-residential stamp duty, and tweaking the tax system towards newer firms, rather than smaller ones, would boost dynamism.

Simon Pittaway, Senior Economist at the Resolution Foundation, said:

“Britain’s already dire productivity record in the 2010s has got even worse during the turbulent 2020s. The recent slump is the worst since the financial crisis and explains why living standards are struggling to grow.

“But while the UK has slumped, the US has boomed. And while its success is often attributed to shale gas and the ‘magnificent seven’ tech firms, there are plenty of other things that US firms are doing right, and that the UK should replicate.

“British firms need to invest more in software to support their workers, and the British economy needs to be more supportive of new firms. Tax reform can encourage these changes as part of wider efforts to boost growth.”