The Big Squeeze – Pay and consumer spending to slow down

With inflation hovering around 2.7 per cent, many businesses are facing a period of higher costs and reduced consumer spending – a trend which could see average pay rises this year hit just one per cent, according to the Chartered Institute of Personnel and Development (CIPD).

In its latest report, the CIPD said that this is the lowest figure for the last three years and well below the 1.5 per cent wage growth the same survey suggested three months ago.

This downward trend seems to be backed up by the Bank of England’s (BoE’s) official data, which suggests that average weekly earnings will grow at a slow rate of two per cent this year, before rising slowly to 3.75 per cent in 2019.

This drop in wage inflation is a direct result of the decision to leave the EU, according to the Bank – a move which has also led to a lowering in the value of Sterling.

While the lower value of the pound has resulted in increased orders and greater demand from the continent and overseas, it has also driven up supplier costs, particularly on imported raw materials and goods.

The CIPD report goes on to indicate that many people in work are also suffering an overhang from the financial crisis, with employees often sacrificing wage increases for job security.

On top of this it also reflects on the UK’s productivity crisis, which has prevented employers from increasing wages. As an example, in the time it takes a British worker to earn £1, a German worker has earned £1.35.

The UK is also behind other key economic powers such as France and America and is not likely to return to a productivity growth level of two per cent per annum until 2020.

Gerwyn Davies of the CIPD, said: “The good news in this latest survey is that employment confidence remains positive, with sectors like manufacturing and production proving particularly buoyant.

“The bad news is that there is a real risk that a significant proportion of workers will see a fall in their living standards as the year progresses, due to a slowdown in basic pay and expectations of inflation increases over the next few months.”

As a result of this fall in wages, consumer spending is expected to drop in the UK, with economic growth forecasts for 2017 dropping from two per cent to 1.9 per cent, according to the BoE’s latest Quarterly Inflation Report.

“This could create higher levels of economic insecurity and could have serious implications for consumer spending, which has helped to support economic growth in recent months. The weak pay data is no surprise given the continued weak productivity growth in the UK,” added Mr Davies.

Link: BoE’s Quarterly Inflation Report