Sweet spot for UK pay could be just the nectar the economy needs

September 16, 2015

RTR309S7.jpgBritish workers have hit a sweet spot with wages rising much faster than near-zero inflation, suggesting the economy could gain further momentum as consumers spend their spare cash.

Average earnings, excluding bonuses, rose at the fastest pace since early 2009 in the three months to July while inflation on a year ago basis was 0.1 percent in the same month.┬áIncluding bonuses, which tend to be more volatile, earnings climbed 2.9 percent, just shy of the Banks of England’s 3 percent projection for 2015.

For the month of July alone, pay excluding bonuses rose 3.2 percent on a year ago, up from 2.8 percent in June, while wage growth in the private sector, which the Monetary Policy Committee looks at closely, surged to 3.4 percent from 2.9 percent.

That has boosted real wage growth, pay minus inflation, to levels last just seen before the financial crisis.


The BoE pays close attention to wages to judge when the economy, and by extension consumers, might be ready for interest rates above their current record low of 0.50 percent.

According to Reuters polls, the BoE will hike in the first quarter of next year – an expectation that steadily has been pushed out as inflation dipped lower, earnings growth hit a plateau and fears of China slowing rocked financial markets.

David Tinsley, economist at UBS, wrote in a note:

The labour market could yet revert back to a weaker outlook. But data today supports our view that the Bank of England will need to think about tightening policy rates around February next year.

Much can still go wrong, of course, and a lot of it external. But the domestic tightening rationale looks on track.

Britain’s economy is in better shape than the euro zone where the jobless rate is almost double of the 5.5 percent in the UK. But there was no inflation – the Bank’s primary mandate – last month after another fall in oil prices that is feeding a disinflationary trend around the world.

The Bank’s latest expectations are for inflation to reach its 2 percent target in the third quarter of 2017, a timeline economists in Reuters polls largely agree with. In its latest Inflation Report, the BoE expects total pay to rise 3 percent in 2015.

According to last week’s Reuters poll, pay rises will outstrip inflation at least until the end of next year.

It may be too early to say whether earnings will continue rising but if they do policymakers will hope it lights a fire under domestic demand and boost inflation quicker than anticipated.

(With additional inputs by Jonathan Cable)

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