Britons face smaller pay rises, in line with BoE’s slowdown forecast
LONDON (Reuters) – British employers plan to offer the least generous pay deals since 2012 this year, the Bank of England said on Wednesday, underscoring its view that the economy is set to suffer from the effects of the Brexit vote.
The economy surprised investors last year when it outpaced its peers among the world’s big rich nations, driven by the spending of households who shrugged off the vote to leave the European Union.
But the pound’s fall of more than 15% against the dollar since June’s referendum is pushing up inflation and is likely eat into the spending power of many households, the BoE says.
Inflation was running at 1.6% year-on-year in January, its highest since mid-2014, and is projected by the BoE to be running at 2.7% in he final quarter of 2017.
In a regular survey of 700 businesses across Britain, the BoE said price pressures were building across supply chains, and firms expected inflation to spread beyond food and fuel prices to a wider range of goods and services this year.
“Consumer spending growth had remained resilient but was expected to ease during the year as prices rose,” the BoE said, reporting on what it had been told.
The BoE predicted last week the economy as a whole would retain much of its momentum this year and grow by 2%. But consumer spending was likely to start to slow markedly before the end of the year, auguring a slowdown in 2018 and 2019.
Bank of England Governor Mark Carney said Britain’s economy would face many “twists and turns” as it prepared to leave the EU in just over two years’ time, and he gave no suggestion that record-low interest rates were likely to rise any time soon.
There have been some recent signs of a slowdown in spending by households. House prices, which are closely linked to consumer confidence, have lost some of their momentum.
However, not everyone at the BoE is convinced that Britain’s economy will start to run out of steam.
Kristin Forbes – the most skeptical of the bank’s policy makers about the need for its huge stimulus program – said on Tuesday that August’s rate cut might need to be reversed soon if growth remained solid and inflation picked up.
“If these trends... are solidified, it will become increasingly difficult for me to justify tolerating such a large and likely overshoot of inflation,” she said.
BoE Deputy Governor Jon Cunliffe, in a speech on Wednesday, said there were both upside and downside risks to the BoE’s forecast of a gentle slowdown in growth, and policy makers would keep a close eye on pay, consumption and inflation.
FALL IN INCOME?
Currently, the BoE forecasts growth in households’ disposable income will slow sharply toward the end of this year and in early 2018, but it won’t fall outright in inflation-adjusted terms.
However, the pay intentions reported in the BoE survey on Wednesday raised the prospect that wages will rise less than the 2.7% projected inflation this year.
Firms contacted by the BoE expected to offer pay settlements of 2.2% on average, down from 2.7% in 2016 and the lowest since 2012.
This is less than the 3% growth in average weekly earnings that the BoE predicted last week for late 2017.
Businesses said their less-generous pay deals this year reflected a smaller increase in the minimum wage than in 2016 as well as difficulties in passing on higher costs to customers.
Furthermore, large companies will also have to pay a new tax to fund apprenticeships this year, pushing up hiring costs at the expense of wages.
Countering this, however, businesses said staff shortages were prompting them to consider bigger pay rises – something also seen in a separate survey published earlier on Wednesday.
The monthly report from the Recruitment and Employment Confederation said starting pay for permanent staff employed via its members rose at the fastest rate in nine months.
“Employers are crying out for people to fill vacancies,” REC chief executive Kevin Green said.
The BoE survey offered little sign of alternative drivers of the economy if consumer spending falters.
On the positive side, factory export orders were the strongest since early 2014, and there were tentative signs of a switch to domestically produced goods from costlier imports. Raw-material costs were rising at their fastest since 2011.
But investment intentions – especially for services companies, which make up the bulk of the economy – remained well below pre-referendum levels.