By David Milliken

LONDON (Reuters) - Britain's economic productivity - the key driver of living standards - has finally clawed back the ground it lost during and after the financial crisis, but remains almost a fifth below where it might have been had the crisis never happened.

Official figures on Thursday highlight the challenge Britain faces as it prepares to leave the European Union, something the Bank of England expects will make firms think twice about costly investment projects to lift long-run efficiency.

British workers' hourly output in the three months to June eked out growth of 0.4 percent compared with a year earlier to match the historic high seen at the tail end of 2007.

"Productivity on this metric has now returned to its pre-downturn level and has slightly exceeded it for the first time since 2008," the Office for National Statistics said.

Britain's solid economic recovery since the financial crisis has been largely driven by higher employment - including more foreign migrants - in contrast to the decline in the share of people in work seen in countries such as the United States.

But Britain's productivity - which lagged other rich countries even before the crisis - has weakened in relative terms over the period.

The ONS estimated productivity was 17 percent below where it would have been if Britain had been able to maintain its pre-crisis growth rate - compared with a 9 percent shortfall in other major advanced economies. This has contributed to weak per capita growth in gross domestic product and living standards.

A post-crisis lack of lending to new businesses, and the low-quality nature of some of the jobs created in the years after, are among the factors economists blame for weak productivity growth. But the exact causes are unclear, and politicians have struggled to solve the problem.


Britain's new prime minister, Theresa May, told her Conservative party's annual conference on Wednesday that there needed to be more house-building and long-term investment to boost productivity.

With Britain set to leave the European Union by the end of 2019, and May committed to controlling the number of migrants, future growth will not be able to rely on a rapidly expanding workforce which increased by 9 percent in the past decade.

Howard Archer, chief UK economist at IHS Markit, saw some positive signs in the latest data, which shows two successive quarters of solid growth after a dip at the end of 2015.

Output per hour grew at a quarterly rate of 0.6 percent in the second quarter and 0.5 percent in the first, after a 0.9 percent drop at the end of 2015.

Unit labor costs - a gauge of medium-term inflation pressures monitored by the BoE - also jumped to an annual growth rate of 1.9 percent in the second quarter from 0.8 percent in the first three months of the year. They rose 1.2 percent in the three months to June alone, the fastest pace in three years.

But Archer said it was unclear that leaving the EU would significantly reduce productivity-sapping regulation in the way in which some of its supporters said it would.

"The downside risk is that prolonged uncertainty and concerns over the UK's economic outlook weighs down heavily on business investment and damages productivity," he said.

"This could be compounded if foreign companies markedly reduce their investment in the UK and this dilutes any beneficial spill-over of skills and knowledge," he added.

(Reporting by David Milliken; Editing by Andy Bruce and Toby Chopra)