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Stagnating productivity is throttling wage growth, says BDO business trends report

Wage growth is being squeezed by a deepening productivity crisis in the UK, according to the latest Business Trends report from accountants and business advisers BDO LLP.

February’s figures reveal that UK business output is slowing down. BDO’s Output Index, which reflects companies’ experience of orders for the coming three months ahead, has fallen from 101.8 in January to 101.7 in February this year.

Growth remains reliant on the services sector as manufacturing has now reached a point of stagnation, with its sub-index sitting at 95.0 – the level between growth and contraction. Optimism among manufacturers is also dragging at 90.4, indicating that manufacturing firms expect their order books to decline in the next six months.

Despite the economy stuttering, jobs are continuing to be created. BDO’s Employment Index, which indicates firms’ intentions to hire, is up slightly at a “healthy” 105.1. However, slowing business output shows that the growing workforce is not increasing productivity. Stalling productivity is now impacting wage growth as firms struggle to increase revenues in order to raise salaries.

“The Chancellor spoke extensively about productivity in 2015 but the UK economy has yet to see any beneficial impact,” said Peter Hemington, partner at BDO. “We now need some real action. The UK’s productivity remains in a state of crisis and come the Budget, George Osborne needs to provide a satisfactory update on how the government will be solving the productivity puzzle.”

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