Member Article

Wages to boost UK spending

UK wage growth accelerated to 1.7% in February, up from 1.4% the month before. Combined with the recent fall in inflation, real wages (i.e. after inflation) may now be turning decisively positive for the first time since the global financial crisis.

We expect wage growth to accelerate to above 2% in the coming months, reflecting the sharp rebound in the UK labour market. Indeed, unemployment fell sharply in February, from 7.2% to 6.9%. This crossed the Bank of England’s (BoE’s) 7% threshold, as a result of which the Bank is technically in its second phase of forward guidance. This means that monetary policy is now being driven by a broader set of labour market and spare capacity variables, and not just one indicator (unemployment).

The big rise in employment was driven by a surge in temporary jobs, which may prove short-lived. Nevertheless, jobless claims point to robust labour market trends and unemployment continuing lower in the coming months. A tighter labour market should ultimately result in higher wage growth.

Even the BoE expects wage growth to accelerate towards 3% by the end of this year, although we believe wages would need to grow at a much faster pace to force the Bank to tighten rates this year. We don’t see this happening and continue to expect the first interest rate rise in the second quarter of next year.

That said, accelerating wage growth could have a substantial impact on disposable income and consumption since this growth applies over a much higher number of people in employment than a year ago.

Real disposable income – comprising wages and other sources of income, such as rentals and income from financial assets – has outperformed real wages since the financial crisis. This has the potential to add further upward pressure to an economy already in strong recovery.

This was posted in Bdaily's Members' News section by Coutts & Co .