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UK wage growth slows to increase squeeze on consumers

Economic News

UK wage growth slows to increase squeeze on consumers

Wed, 17 May 2017
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UK wage growth slows to increase squeeze on consumers

(ShareCast News) - Although the UK unemployment rate fell to its lowest since 1975, weekly wage growth slowed to heap further pressure on consumers already battling with rising inflation.
The unemployment rate unexpectedly fell to 4.6% for the three months to March, data from the Office for National Statistics showed on Wednesday, when it was expected to remain at 4.7% for the third month.

But despite the tightness of the labour market, employers are not increasing pay.

Average weekly earnings excluding bonuses fell 0.2% in real terms compared with a year earlier, though was up 0.1% if bonuses are included.

In nominal terms, average weekly earnings rose 2.1% ex-bonuses, which was worse than the 2.2% increase the market expected and the smallest gain since July of last year, while the 2.4% gain including bonuses was in line with forecasts.

That was not all the bad news, as the more timely measure of the claimant count rate in April showed an increase to 2.3% from the 2.2% previously, with the claimant count up 19.4K, ahead of the consensus forecast of 7.5K.

Wage freeze and inflation squeeze

In the short term, the sluggish wage growth add to fears that weaker consumer spending will see economic growth slow in coming months, given that inflation picked up to 2.7% in April and so is likely to be exerting a major squeeze on real wages.

Chris Williamson at IHS Markit pointed out that the pay data come hot on the heels of Tuesday's news that inflation has spiked to 2.7%, "meaning real pay is falling at the steepest rate for two-and-a-half years".

"The weakening wage trend amid an increasingly tight labour market underscores how the old rules of the labour market no longer seem to apply. The fact that fuller employment and lower unemployment is not pushing wages higher raises questions about the extent to which pay will rise in coming years.

"Employers seem able to dictate pay growth to a degree not seen in previous spells of very low unemployment," Williamson said.

Disagreement over UK growth effect

Paul Hollingsworth at Capital Economics acknowledged that the real wages squeeze is likely to weigh on consumer spending growth in the near term but he felt the strength of employment by 122,000 in the three months to March to a new record high of 74.8% was "one reason to be optimistic that the slowdown in spending won't be too severe" as he thinks this tightening will deliver a modest rise in nominal wage growth over the course of this year.

EY Item Club economist Martin Beck said the slowdown in consumer spending resulting from the squeeze on real pay, "in turn risks pushing unemployment up and depressing pay growth", creating a vicious circle that suggests the latest numbers "may be as good as it gets for the labour market for now".

That real wages aren't a major political issue is somewhat baffling, said currency analyst Ranko Berich at Monex Europe.

"Real wage growth has essentially been negative for a decade, barring a brief respite due to falling oil prices over the last couple of years," he said.

"The Bank of England was rather optimistic about the medium term prospects for real wage growth in last week's inflation report, which Carney said would follow a U shape, falling in the short run and rising over the coming years. This may yet come to pass, but for now the prospect of prolonged pain for households is more of an immediate concern, especially considering the importance of consumer spending to UK growth in recent years."