Stronger together: Wales and the UK’s productivity challenge

By Dr Fari Aftab, Wales Productivity Forum Research Associate

This blog is inspired by an event held at Cardiff University, in collaboration with the Wales Productivity Forum. At the event, Dr Thomas Nicholls, Chief Economist for the Welsh Government, presented findings from the Wales Economic and Fiscal Report 2025: Five Essential Insights. The reflections below draw on both his presentation and the wider conclusions of the report.

Wales and the UK: one connected economy

The Wales Economic and Fiscal Report 2025 highlights the extent to which the Welsh economy is integrated with the wider UK system. Welsh firms are deeply embedded in UK supply chains. Around one third of business-to-business sales flow to the rest of the UK, while nearly half of firms’ purchases come from UK suppliers. The result is a shared economic journey, where Wales benefits when the UK grows and Wales suffers when it faces a slowdown.

This close connection is not a disadvantage. It is simply how the Welsh economy operates, where the changes in output, living standards and employment usually follow UK patterns, reflecting the shared markets, policies and challenges connecting the economies.

As Dr Thomas emphasised, Wales’s ties to the UK should shape how policymakers and businesses think about productivity and growth. The opportunity lies in collaboration, shared learning and learning from other regions.

Productivity and living standards

Productivity, defined as the value created for each hour worked, lies at the core of economic wellbeing. It determines wages, living standards, and the capacity to fund public services. Yet for over a decade, productivity growth has exhibited prolonged stagnation, creating what economists have called the “productivity puzzle.”

According to the report, Wales remains below the UK average in terms of productivity performance, producing 84.9% of output per hour relative to the UK benchmark. There is nonetheless some encouraging progress. Since 2009, output per hour in Wales has grown by 14.1% compared with 10.5% across the UK, indicating gradual catch-up.

However, this reflects a relative outperformance amid a broader slowdown in productivity growth across the UK (and Wales), where annual rates have fallen to near zero in recent years, highlighting the ‘productivity puzzle’ rather than absolute gains.

Crucially, the report shows that differences in productivity across UK regions are driven far more by how firms perform within sectors than by the sectors themselves. Between 70 and 80 per cent of regional variation can be explained through within‑industry differences.

While certain areas (such as urban clusters in London or Cardiff) show higher productivity due to geographic advantages that support better firm clustering, in practice this means management quality, innovation and the adoption of new technologies often matter more than sector composition alone.  For Wales, this suggests that supporting existing firms to enhance their performance could be more impactful than efforts focused solely on attracting new industries.

The Wales Economic and Fiscal report 2025 makes a crucial link between productivity and well-being, noting that higher productivity is the only sustainable route to improving material living standards over the long run.

Although Welsh median household incomes remain below the UK average (at around 93% before housing costs and 95% after housing costs), expenditure data indicates that the gap in living standard may actually be wider than income measures imply. Despite Wales’s lower cost of living, real spending power still lags further behind.

This aligns with discussions within The Productivity Institute that productivity improvements are essential for securing better jobs, stronger public services and long-term well-being for future generations in Wales.

Working together for growth

Dr Thomas noted that both the UK and Welsh governments operate under significant fiscal pressures. This limits the scope for major increases in public spending as a driver of growth This makes productivity crucial: it is not about producing more, but about ensuring stronger and more sustainable public finances in the long run.

Addressing the issue requires a joined‑up approach that connects Welsh priorities with UK‑wide initiatives in innovation, skills, and digital development. Opportunities include:

• Skills and training: Aligning Welsh education and training provisions with the UK’s emerging sectors in digital and green technology.
• Business support: Opening stronger pathways for Welsh SMEs to access UK innovation and finance opportunities.
• Infrastructure investment: Aiming for targeted improvements in transport and digital networks to enhance the movement of people and ideas across regions.

These areas all strengthen one another. The report stresses that productivity should not merely be seen as an economic metric but as the collective product of systems working together through collaboration.

Moving forward together

The Wales Economic and Fiscal report 2025 presents Wales as economically unique but still deeply tied to the UK’s overall system.  Wales shares many of the UK’s challenges, including slow growth, ageing populations and budget pressures, but also shares in the opportunities for recovery and renewal.

The productivity puzzle is not just Wales’s challenge alone. It is a UK-wide issue that demands coordinated thinking and shared solutions. Wales has demonstrated in recent years that progress is possible. Employment performance, for example, has moved closer to the UK average since devolution. This resilience in the labour market offers an encouraging sign: progress is possible when policy, skills and business investment align.

The next step is to build on that progress through stronger connections: learning from successes elsewhere and sharing Wales’s own innovation as part of the UK’s broader renewal. As Dr Thomas highlighted, the Welsh economy does not move separately from the UK. The goal now is to ensure that it moves forward with it.

“We were delighted to host this event on the Welsh economy at Cardiff University where Dr Thomas Nicholls outlined both the challenges and opportunities for economic growth in the context of the current Welsh Government Draft Budget.”
Professor Melanie Jones, Academic Lead, Wales Productivity Forum

“Boosting productivity is essential for sustainably improving living standards in Wales. Increasing productivity is also crucial for strengthening public finances so that governments can provide better public services and be more able to tackle long-term challenges.”
Dr Thomas Nicholls, Chief Economist, Welsh Government