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UK wage growth disappoints despite record low unemployment

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UK wage growth disappoints despite record low unemployment

Wed, 13 September 2017
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UK wage growth disappoints despite record low unemployment

(ShareCast News) - UK earnings growth continues to lag well below inflation despite the unemployment rate falling to a new record low.
Average weekly earnings growth remained at 2.1% for the three months to the end of July, the Office for National Statistics reported on Wednesday, short of the expected 2.2%. For the single month of July, earnings growth dropped to just 1.4% from 2.8%.

Excluding bonuses, average earnings were also up 2.1% compared to the same period last year versus the 2.2% consensus forecast.

This disappointing wage data came despite the UK ILO unemployment rate falling to 4.3% from 4.4%, where it had been forecast to stay and which is further below the Bank of England's estimate of the equilibrium rate.

There was an 181,000 improvement in employment in the three months to July compared to the three months to April.

In more timely data, jobless claims fell 2.8K in August, which was more than expected, with a claimant count rate of 2.3% last month, the same as in July.

The pound lost some of its gains against the dollar but only to 1.3281, while falling 0.2% against the euro to 1.1082.

"Lagging wages makes it more likely the Bank of England will look through rising inflation when it decides on interest rates this week," said Ed Monk, associate director for personal investing at Fidelity International. Prices are rising above target, which creates the case for raising rates, but today's wage data suggests all is still not right in the economy."

Andrew Wishart at Capital Economics said that while the continued strength of employment will be welcomed by the Bank's Monetary Policy Committee, the continued absence of a pick-up in wage growth is likely to keep the doves in the majority.

"And with inflation reaching 2.9% in August, the squeeze on households' real incomes probably intensified. That would make the risk of a sharper downturn in consumer spending the overwhelming concern to the majority of the MPC members.

"In our view, net trade and investment look likely to take up this slack, while continued strong employment growth should eventually feed through to stronger wage pressures."

Naeem Aslam, an analyst at Think Markets UK, said the pound was falling as the wage growth data "was as bad as it can get", with currency traders shaving profits after sterling reached $1.33, as the Bank of England would not choose to "choke the consumer" further by increasing the interest rate amid high inflation.

Neil Wilson at ETX Capital said the pound is at a crossroads ahead of Thursday's Bank of England monetary policy announcement, trading close to $1.33 where it is 11% above its January lows and 11% below the highs preceding the Brexit referendum result.

He outlined a range of political and economic factors that will help shape the direction for GBPUSD over the coming months, but though unlikely to result in a rate hike soon in view of the MPC having stressed that they are "looking through" inflation. which is felt to be driven by the pound rather than demand and therefore expected to retreat soon.

"While higher inflation is pushing up rate hike expectations, it does not appear to be enough to warrant any tightening this month. The stuttering wage growth figures and subsequent drop in cable reflect the fact that the conditions are not yet in place for any tightening," Wilson said.

"Nevertheless, the rally in sterling looks ominous for a hike sooner rather than later, and a sign that the market is at long last starting to take seriously some of the more hawkish language we've heard over the last few months. In the minutes of its last meeting on August 3rd the Bank said that monetary policy could need to be tightened by a somewhat greater extent than financial markets are suggesting. Carney said outright in the press conference that one hike over the next three years would not be enough to tame inflation."

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