UK consumer crunch intensifies as earnings growth slows amid inflation spike

The squeeze on UK households is tightening, as wage growth continues to slow amid a spike in inflation, meaning real wages are falling at the fastest pace in three years.

UK average weekly earnings including bonuses for the three months to April slowed to 2.1% from a revised 2.3% a month ago, which was well short of the market's estimated rise to 2.4%.

Excluding bonuses, basic wages grew just 1.7% in the period, the Office for National Statistics revealed on Wednesday, down from 1.8% and shy of the consensus forecast of 2%.

With inflation averaging 2.4% over the three-month period and CPI jumping to 2.9% in April, UK real earnings are being squeezed significantly.

This meant inflation-adjusted annual wage growth for total average earnings was negative for the first rime since September 2014, down 0.4%, with the basic pay rate down 0.6%.

This comes despite the ILO unemployment rate for the three months to April staying at 4.6%, the lowest since 1975, as expected.

Furthermore there was a 109,000 increase in employment compared to the preceding three-month period, or up 372,000 compared to last year, meaning the proportion of people of working age in employment was 74.8%, which is the joint highest since comparable records began in 1971.

But more recent data showed the employment market softening, with the ONS's claimant count rate, measuring the number of people claiming jobless benefits in the month of May, up 7,300 after a 22,000 increase a month before.

'Real worries' for households and UK economy

“Rising inflation and weak wage growth means UK real earnings is falling at the fastest pace in three years. The wages we are earning is not nearly keeping up with the price of goods and services we consume, tightening the squeeze on UK household finances," said Maike Currie, investment director for personal investing at Fidelity International.

This drop in real pay adds to worries about the economic outlook, said Chris Williamson at IHS Markit, with recent official and survey data showing consumer spending coming under strain as households feel the pinch from rising prices and low pay.

"Today’s data will add further to the likelihood of consumer spending acting as a drag on the economy in coming months, leaving growth largely dependent on exports, corporate services and business investment," he said.

“While the upturn in employment is further confirmation that businesses were preparing for stronger growth ahead by expanding capacity earlier in the year, the concern is that the uncertainty caused by the shock general election result will have undermined business confidence, leaving the economy devoid of any significant domestic growth drivers as both business and consumer spending come under pressure."

'Working for nothing' in 2017

Barclays' Andrzej Szczepaniak agreed that there looked likely to be a consumption-driven economic slowdown and warned the "working for nothing" trend was only going to get worse this year.

Based on wider business forecasts he calculated real wages will fall 0.4% for 2017 as a whole, with the Bank of England expecting real core wage growth of -0.8% for 2017, meaning real wage growth will deteriorate over 2017 as inflation continues to rise in coming months.

"As real wage growth deteriorates throughout the course of 2017, which we believe will be the case, households will be forced to tighten their belts, only amplified by the expected tightening in unsecured consumer credit as reported by the latest Bank of England Credit Conditions Review, all in all leading to a consumption driven slow down in overall activity," Szczepaniak said.

Economist Chris Hare at HSBC said a key economic theory was being challenged by the low unemployment and low wage growth.

"The theory of the Phillips curve, whereby less slack in the labour market should lead to higher wage growth, continues to be confounded."

Upward pressure on pay will intensify as the year goes on, he added, but the period of negative wage growth "might prove persistent – that is likely to weigh on household spending and the economy as a whole".

How long will the squeeze last?

Although the labour market report showed that the squeeze on real wages is intensifying, Scott Bowman at Capital Economics said it was clearly likely to weigh on consumer spending growth in the near term but argued that strength of employment was a sign that this squeeze "might not weigh too heavily on consumption".

He said the rise in employment will support overall household incomes, while the long-term low unemployment rate "suggests that nominal wage growth will eventually start to rise", while forecasting inflation will fall back next year towards target as the upward pressures from the drop in the pound start to fade.

"Accordingly, the forthcoming squeeze on real wage growth should be nowhere near as severe or prolonged as that seen after the financial crisis."

Nevertheless, focusing on the immediate impact for workers' finances, TUC general secretary Frances O’Grady noted that with real wages falling for the second month in a row, "this soon be in the middle of another cost of living crisis".

“Ministers must focus on delivering better-paid jobs across the UK. And it’s time to bin the artificial pay restrictions on nurses, midwives and other public sector workers. Britain needs a pay rise, not more pressure on household budgets.”