Weak pay growth to increase pressure on consumers - EY ITEM Club comments

12 April 2017

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  • Labour market picture remains robust
  • With employment increasing and jobless numbers falling
  • But real pay growth is squeezed ever more by rising inflation

Martin Beck, senior economic advisor to the EY ITEM Club, comments:

“Having stumbled towards the end of 2016, the latest labour market numbers, covering the three months to February, returned to modest improvement. The number in work rose by 39,000 on the previous three months, maintaining the employment rate at 74.6%, the joint highest since records began in 1971. Vacancies touched a record high and the number out of work fell by 45,000. However, with the number of inactive people also declining, the Labour Force Survey (LFS) unemployment rate was unchanged at 4.7%, a near 12-year low.

“But this roll of impressive outturns is still failing to translate into a meaningful pick up in pay growth. Admittedly, annual growth in total pay rose to 2.9% in February from 2% the previous month. But this was more than accounted for by a surge in bonuses – regular pay growth actually fell. And on a three-month basis, the annual rise in total pay remained stable at 2.3%. Adjusted for inflation, this left real pay only 0.1% higher than a year earlier, the weakest outturn since early 2014.

“This is bad news for consumer spending, a sector which is already showing signs of running out of steam. Granted, the apparent tightness of the jobs market may see pay growth suddenly break out significantly to the upside. But with pay remaining so unresponsive for so long, the chances of this happening look slim.”