British firms continue to hire staff but output is struggling to pick up, meaning the UK's already "alarmingly" low productivity levels are likely to get worse, according to the latest Business Trends Report.
The Employment Index measuring companies' recruitment intentions rose in February and sits above the long-term average. Employment has grown steadily for the last six months, while the unemployment rate, currently 4.7 per cent, is the lowest for 40 years.
However, the Output Index, which indicates how businesses expect their order books to develop over the next three months, fell in February and remains well below its long-term growth trend.
Accountant BDO, which compiles the report, said the figures highlight the severe difficulty the economy is having boosting productivity, despite marginal increases announced by the ONS in April.
The impact of poor productivity is also being passed on to households. Earnings growth has almost halved compared with before the financial crisis, while the Inflation Index reached a five-year high in February. With prices of goods continuing to adjust following recent currency depreciation, inflation looks set to rise even further in the coming months, BDO said. These factors suggest that unless productivity improves quickly, there will be a further squeeze on consumer spending.
Peter Hemington, partner at BDO, said: "Poor productivity performance is one of the UK's biggest economic challenges. The Chancellor spoke at length about solving the productivity puzzle when he delivered the Budget, announcing measures to invest in technical education and digital infrastructure to improve productivity. But his measures are very unlikely to be enough.
"The UK is a low investment economy with an education system that doesn't always deliver the goods. Successive governments should be applauded for the hard work done to improve education in England, which has shown real progress in recent years. But technical education has not improved and there must be doubt as to whether this nettle is really being grasped.
"As for investment, the Government should have the courage to borrow more to invest in the nation’s increasingly threadbare and out of date infrastructure."