UK pay rising at fastest pace for seven years

Although average earnings are still about £30 a week lower than before the financial crisis, the Bank of England has predicted that wage growth will continue to strengthen in the short term, helping near-zero inflation return towards its 2 per cent target.

The Office for National Statistics (ONS) will publish its latest data – covering the three months to June – on Wednesday, and IHS Global Insight’s chief UK and European economist, Howard Archer, is forecasting that the figures will show underlying annual pay, excluding bonuses, growing at 3 per cent – the fastest pace since December 2008.

He added: “We expect earnings growth to trend up over the coming months as ongoing decent economic growth, narrowing slack in the labour market and relative optimism in the outlook causes a growing number of employers to lift pay.

“With earnings growth likely to strengthen further over the rest of 2015 and consumer price inflation remaining extremely low, workers should enjoy healthy purchasing power, which bodes well for consumer spending.”

However, the prospect of average earnings growing at 3 per cent or more is likely to raise hackles among public sector workers, who were told by Chancellor George Osborne last month their pay increases would be capped at 1 per cent for the next four years.

Economist at Barclays said the overall wage growth forecast for 2015 now stands at 3 per cent, up from 2.5 per cent previously, although they expect the Bank of England to keep borrowing costs on hold until the first quarter of next year as members of its rate-setting monetary policy committee (MPC) keep a watchful eye on factors including inflation, import prices and risks to the global economy.

In its latest inflation report, published last week when the MPC voted 8-1 to maintain interest rates at their record low of 0.5 per cent, the bank said: “Wage growth is expected to continue to strengthen in the near term, reflecting the past narrowing in labour market slack and the pick-up in productivity growth.”

However, it said the pace of pay increases is forecast to weaken in the final three months of this year, reflecting a strong round of bonuses paid out a year earlier.

“As the impact of temporary factors currently weighing on wage growth – such as subdued labour turnover – diminish, wage growth is likely to outpace productivity growth further,” the bank added.

“This will gradually raise unit labour costs, consistent with inflation returning to the MPC’s 2 per cent target.”

Morgan Stanley economists have pencilled in an increase in the UK’s unemployment rate to 5.7 per cent for the three months to June, up from the 5.6 per cent figure recorded for the previous month, which marked the first rise in the jobless rate for two years.

With many business surveys point to “decent, but slowing” gains in employment, Morgan Stanley said labour demand would remain relatively strong over the coming quarters, but the impact will be reflected in rising pay and productivity – combined with a continued shift from part-time work and self-employment into full-time roles – rather than sharp falls in the jobless rate.

Archer added: “How earnings develop over the coming months will play a crucial role in just when the Bank of England starts to raise interest rates. Should earnings growth pick up markedly over the coming months, it would increase the likelihood that the Bank of England will raise interest rates early on in 2016.”