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UK's Osborne says banking weakness at heart of productivity problem

LONDON (Reuters) - Chancellor George Osborne said on Tuesday that Britain's low productivity growth was disappointing, and put most of the blame on the slowness of a recovery in bank lending after the 2008 financial crisis.

While banks have resumed some of the lending that dried up after 2008, many small and medium sized firms still complain of a lack of access to funding to pay for the investment and expansion that can generate higher output per worker.

Osborne said the country's surprisingly strong economic recovery was sustainable, despite international risks such as recent weak data in the United States and turmoil in emerging markets, but that productivity needed to improve.

"Productivity has disappointed," he told lawmakers at a parliamentary hearing. "Ultimately longer-term prosperity and a sustained recovery does require an improvement in productivity."

While Britain's unemployment is falling and the economy is growing at its fastest rate in six years, policymakers at the Bank of England have voiced concerns that output per worker has remained broadly stagnant.

In December, data showed output per hour worked fell 0.3 percent in the third quarter after showing its first increases in nearly two years in the previous two quarters.

Many economists point to surplus capacity caused by lower-than-expected job losses during the post-crisis recession as an explanation for low productivity. But Osborne said he believed the problem was primarily down to weakness in the banking sector.

"Credit allocation and the impairment of the banking system ... has probably been the strongest cause of the weak productivity performance," Osborne said, although he stressed the exact causes were difficult to quantify.

(Reporting by William James; Editing by Alison Williams)