Real wages have seen the sharpest annual fall in three years, down 1.5 per cent year on year in April, the latest UK labour market figures show.
The year-on-year growth in average weekly wages dropped from 2.4 per cent in March to 1.2 per cent in April, dragging down the headline rate to 2.1 per cent from 2.3 per cent in March and undershooting the consensus, 2.4 per cent.
Average pay excluding bonuses grew by 1.7 per cent although after inflation this means earnings in the three-month period fell by 0.6 per cent year-on-year.
The three-month average unemployment rate was 4.6 per cent in April, the same as March.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says today’s figures are reminiscent of 2011/2012 when inflation surged but wage growth weakened. Inflation numbers released by the ONS yesterday show CPI jumped 0.2 percentage points to 2.9 per cent in May, the fastest pace for almost four years.
“In one line [this shows] astonishingly weak wage growth,” Tombs says, adding that “the real wage squeeze is set to intensify over the coming months, before it eases in 2018”.
“The wage numbers seemingly jar with the rest of the labour market data, showing that the unemployment rate is at its lowest rate since 1975 and inactivity among working-age adults is at a record low. Employment also was 109,000, or 0.3 per cent, higher in the three months to April than in the previous three months and job vacancies have remained close to a record high.
“The labour market, however, is less tight than these figures suggest. For instance, quarterly data last month showed that underemployment—the proportion of workers who want to increase their hours and are able to do so within two weeks—had edged up to 8.4 per cent in Q1 and well above its pre-crisis low of 6.2 per cent. In addition, Britain still is able to draw on workers from the rest of the EU, where unemployment is double the UK’s rate. Accordingly, we expect firms to remain successful in implementing well-below inflation pay rises this year.”
Ben Brettell, senior economist at Hargreaves Lansdown, says that following disappointing GDP figures for Q1, the UK economy now faces “a dangerous cocktail of political uncertainty, slowing growth and shrinking real wages”.
“Households are being squeezed from both directions, with inflation rising faster than expected and wages rising more slowly. This doesn’t bode well for economic growth – the UK economy is heavily reliant on the consumer and falling real incomes will eventually translate into lower retail sales.
“Wage growth is one of the Bank of England’s key metrics when setting interest rates, as higher wages can ultimately create upward pressure on prices. As yet it seems there is little evidence of this type of ‘wage-price spiral’, which should give the Bank enough latitude to look through higher inflation and hold rates at 0.25 per cent for now.”
Scott Bowman, UK Economist at Capital Economics, says the squeeze on real wages may not have a huge impact on consumption.
While the drop in real wages and pick-up in inflation will weigh on consumer spending in the short term, Bowman says strong employment growth “is one reason to be optimistic”.
“The rise in employment of 108,000 in the three months to April kept the annual growth rate at 1.2 per cent and will support overall household incomes,” Bowman says.
“Meanwhile, the fact that the unemployment rate remained at its joint-lowest rate since July 1975 of 4.6 per cent suggests that nominal wage growth will eventually start to rise. And we think that after peaking at a bit over 3 per cent in Q4, inflation will fall back 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.”