Analysts point to early signs of a technology-driven pickup in productivity growth, which could signal a brighter economic outlook for the UK and reverse years of underperformance. An analysis of official data by investment bank Morgan Stanley shows that private sector productivity rose 1.8% year-on-year in the second quarter, up from 1.2% previously. This pace extends the upward trend seen since 2024 and narrows the growth gap with the United States.

Opinion is sharply divided on the reasons behind this productivity surge, but some analysts attribute it to the growing use of artificial intelligence in sectors such as information technology and business services. If the recent acceleration can be sustained for several years, it would boost household incomes and help ease some of the pressure on UK public finances.

Bruna Skarica, economist at Morgan Stanley, said: "If the UK private sector can sustain current productivity growth for longer, the odds increase that this cyclical recovery has a durable structural component."

"It is entirely reasonable to ask whether the persistent productivity gains seen in the US post-pandemic will, after a time lag, spark a similar rebound in the UK as AI adoption spreads."

These figures come as a boost to John Healey, the new Chancellor of the Exchequer, who has already benefited from strong second-quarter GDP data and now has added momentum heading into his October Budget. After the 2008 global financial crisis, UK productivity growth was persistently weak, living standards stagnated, and public finances came under increasing strain — until now, productivity is finally accelerating.

Last year, the Office for Budget Responsibility cut its medium-term potential productivity growth forecast by 0.3 percentage points to 1%. That downgrade by the independent fiscal watchdog was a blow to the then-Chancellor, Rachel Reeves, who has repeatedly stressed that economic growth is the government's top priority.

Data issues at the Office for National Statistics have clouded the productivity picture. The ONS's conventional measure shows more subdued productivity growth, based on the Labour Force Survey, which is suffering from low sample response rates and is currently being replaced. As a result, economists are increasingly turning to an alternative ONS labour market indicator, which uses taxpayer data from the government's Pay As You Earn system. This measure shows a significant rebound in output per worker since 2024, a trend confirmed by new data released by the ONS this week. Morgan Stanley's productivity gauge is based on the latest data and strips out public-sector-dominated sectors such as education and healthcare.

Andrew Wishart, UK economist at Berenberg Bank, said the widening adoption of AI in certain industries could be a driver. He noted that output in information technology and tech services has grown strongly since 2024 without a corresponding rise in employment, representing an increase in output per worker.

The Bank of England's regional agents reported last month that AI adoption is boosting productivity in software, finance, customer services, professional services, and the creative industries. "Firms deploying AI at scale and efficiently can raise output without a corresponding increase in headcount, and in some cases reduce staffing requirements," the agents said.

John Van Reenen, professor at the London School of Economics and former chair of Reeves's Council of Economic Advisers, estimates that UK annualised productivity growth has reached 1.6% since the third quarter of 2024, compared with just 0.3% in the previous decade. He also attributes some of the improvement to AI, drawing a parallel with the late 1990s to early 2000s, when the US experienced an ICT-driven productivity boom that only appeared in UK statistics after a lag.

However, given the limited evidence so far, economists are sharply divided on AI's actual contribution at this stage. Michael Saunders, adviser at Oxford Economics and former Bank of England Monetary Policy Committee member, noted that the UK sectors with the biggest productivity improvements over the past two years compared with the prior decade include accommodation, wholesale, and retail — not industries at the forefront of AI adoption.

Many companies have slowed hiring or cut staff because Reeves's policies — including higher employer National Insurance contributions and a higher minimum wage — have raised the cost of employing lower-paid workers. This has hit opportunities for low-skilled jobseekers and young people trying to enter the workforce, with youth unemployment near an 11-year high. If productivity gains stem from workers being priced out of the labour market and unable to find alternative jobs, that reflects a less healthy economic picture.

Saunders said this does not mean AI will not drive broader productivity gains in the future, "but the current industry data suggests it is not yet the main driver."

Analysts say it is too early, in any case, to expect productivity growth to change the OBR's view of trend productivity — a key input for its forecasts of tax revenues and budget deficits. Wishart said the UK's recent solid growth without employment expansion is "noteworthy," but what matters is the long-term trajectory of productivity. "There will be no surprise fiscal windfall from this in the Budget."