Pay picking up as firms struggle to find staff

Annual wage rises have increased from an average of 2pc towards 3pc, says the Bank of England

PAY could be starting to pick up as a shortage of workers forces companies to shell out more for their staff.

Businesses in both the manufacturing and services sectors intend to hire more workers, but the very low unemployment rate means it is hard to find the right staff.

Now the Bank of England’s agents, who study economic conditions across the UK, might be seeing hints that wages are rising as companies seek the employees they need. The impact so far is only modest, but could raise hopes of a more sustained rise in pay.

Average annual pay rises fell to below 2pc in the wake of the financial crisis, slowly creeping up to 2.7pc last year. Officials expected that to fall to around 2.2pc for 2017, and as recently as May said that awards were clustering at between 2pc and 2.5pc.

But now they have tentatively increased that estimate, noting pay awards currently sit at between 2pc and 3pc. Mark Carney, the Bank’s Governor, is watching closely for any signs of pay rises as the Monetary Policy Committee wants to know if it needs to raise interest rates to stop inflation getting out of hand.

Employment intentions among businesses in the services sector are back up to levels last seen before the EU referendum last year, while manufacturing hiring intentions are at close to their highest level since 2014. Unemployment has fallen steadily throughout the last year despite worries around the Brexit vote’s impact on the economy, and the increased willingness to hire indicates that trend is not over.

The index tracking recruitment difficulties rose to its highest level since the end of 2015, and manufacturers are facing the tightest capacity constraints since 2007 – all of which point to rising wages. “Recruitment difficulties had edged higher, and were gradually broadening across sectors and skill areas. Despite this, labour cost growth had been modest, with pay awards clustered around 2pc to 3pc,” the Bank said.

“Growth in manufacturing [employment] intentions was stable and was dampened by a stronger focus on productivity improvements and automation over job creation.”

Extra demand for factory goods came from domestic and foreign buyers. The index for local demand hit 1.8, its highest level since September 2014. Output for export hit 2.6, the highest number since 2011, adding to evidence that the weak pound is making UK manufacturers more competitive.

Investment intentions have also picked up this year but in services remain below pre-referendum levels. Factory investment plans have also picked up, but are still below the levels in 2014 and 2015, suggesting that Britain’s longer-term problems with business investment have not gone away.