Bridging the Gap: Understanding the UK-US Productivity Decoupling

The UK’s productivity gap with the US has widened over the past two decades, with productivity growth rates decoupling after the Global Financial Crisis (GFC). This paper complements existing studies by using sectoral and firm-level data to discuss different microeconomic drivers of the diverging trends. While the loss of pre-GFC growth engines, in particular the leverage-driven boom in the financial sector, accounts for a large part of the productivity slowdown relative to the US, it is only part of the explanation. Outside the financial sector, the UK’s publicly listed companies, especially frontier firms, have lagged behind the US due to a significant decline in post-GFC total factor productivity (TFP) growth, resulting in widening efficiency gaps within firms. We discuss how reduced investment in intangible capital following the GFC, along with lower R&D spending compared to the US, may contribute to subdued TFP growth among UK firms. To revive productivity, this analysis suggests a two-pronged approach aimed at: 1) building on the UK’s strengths and revitalizing traditional growth engines, especially the financial and ICT sectors; and 2) fostering a more conducive environment to business innovation through greater access to scale-up finance and continued efforts to retain high skilled individuals.