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UK wage growth may level off

Aug 13 2015 08:58

London - This year's rebound in British wage growth risks petering out, potentially wrong-footing the Bank of England (BoE) as it gets closer to raising interest rates, if omens from labour market data prove correct.

British wages have risen far more slowly in recent years than before the financial crisis, and a move back towards historical rates of increase is one of the main things the BoE is looking for before it starts to tighten policy.

Last week it forecast annual wage growth would reach 3% by the end of this year. It predicted even bigger rises in 2016 and 2017, as productivity picks up and unemployment falls, forcing firms to compete harder for workers who are increasingly willing to switch jobs.

This points to annual growth in basic pay of around 4%, the rate that was common before the financial crisis.

Many economists broadly back the BoE's view.

But a dig through some of Britain's many business surveys suggests the predictions for the coming year may be too high.

Data on Wednesday showed the sharpest slowdown in wage growth in more than a year - mostly due to relatively modest bonuses - and there are signs this could spread to basic pay as well.

Responses to questions about wages in surveys from the British Chambers of Commerce (BCC), the Recruitment and Employment Confederation (REC), and a survey by the BoE's own regional offices all suggest wage growth could soften.

"I think there probably has been a pick-up in the underlying rate of wage growth, but that occurred in the second half of last year," said Stephen Lewis, chief economist at ADM Investor Services. "There doesn't seem to be very much evidence that there's been further upward progress so far this year."

All three surveys have elements that give a reasonably good prediction of what Britain's official wage data will show in several months, and they all point to a fall or levelling off in the rate of wage growth, which stands at just under 3%.

While the BoE expects total wage growth to soften towards the end of this year because of the effect of strong bonuses in late 2014, the surveys point to an underlying flattening in the private sector.

Every three months the BCC asks companies across the vast services sector what pay deals they are reaching with staff.

Late last year these hit their highest level since the pre-crisis days of early 2008, but then tailed off over the past six months.

Analysis using Thomson Reuters Datastream points to a strong correlation between this measure and official wage growth in nine months' time.

There is a similar strong link - this time with a five-month lag - between official data and the BoE's own score of labour cost per services employee in its monthly regional survey. This measure has plateaued since it hit its highest since September 2008 last October.

Finally, the REC's monthly index of starting salaries shows a moderate correlation with official data 12 months later and has been mostly falling since July 2014.

Slow progress

The BoE charted pay measures from all three surveys in its economic forecasts outlook published last week, though it smoothes the data in the BCC survey, making the recent plateau in pay deals less visible.

But not all economists share the conclusions it reached.

"I think we're close to a plateau around 3%," said Scotiabank economist Alan Clarke, referring to annual wage growth.

Clarke believes part of the recent rise in wages was due to one-off effects related to unusually low wages a year ago rather than stronger fundamentals, and month-on-month changes to wages over the last year suggest only a very slow improvement, rather than a swift upturn.

He still expects the BoE to start to raise rates early next year when inflation is tipped to rise from its current level around zero.

"As long as the data aren't really surprisingly weak, I don't think that'll obstruct a rate hike," he said.

boe  |  uk  |  economy
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