Workers will be hit by Brexit squeeze this year, warns Bank of England
The impact of Brexit will contribute to a dramatic drop in real-terms pay this year, the Bank of England has warned, with average workers due to be left hundreds of pounds out of pocket. Inflation will be higher than pay growth, the Bank’s Governor Mark Carney predicted – marking the first year since 2013 that workers have been hit by a real-terms cut in take-home pay.
Salaries will be almost £1,000 lower than forecast before the Brexit vote, ministers have been warned, and £320 down on predictions just three months ago. The grim outlook, delivered four weeks before the general election, was “another sign of the Brexit squeeze”, the Liberal Democrats warned. It made Theresa May’s plan – if she wins the election – to pull Britain out of the EU single market and customs union “even more reckless than ever”, the party said. Even before the fresh squeeze to living standards, the decade was already on course to be the worst for pay growth for more than 200 years, an independent think tank said. In more bad economic news, industrial output dropped by 0.5 per cent in March and the construction sector by 0.7 per cent, as the trade deficit grew.
Vince Cable, the Lib Dem treasury spokesman, said: “Consumer debt drove a short-term boost in the wake of the Brexit vote, but it is now clear that this is rapidly running out of steam. Growth has slowed to a crawl, production output is turning downwards, and our economy has not been in a more worrying state since the aftermath of the 2008 financial crash.” John McDonnell, the shadow Chancellor, said: “There is no hiding from the truth. The Tories’ failed economic plan is holding Britain back, and is undermining our economy and threatening working people’s living standards.”
The Joseph Rowntree Foundation described the forecasts as “troubling news for millions of families who are working but already struggling to make ends meet”. Campbell Robb, its chief executive, said: “In next week’s manifestos, we need to see parties bring forward plans to ease the strain so work provides a route out of poverty.”
The warning follows controversy over rising energy bills and inflation-busting increases in council tax that have already hit household budgets ahead of the 8 June general election. At the Bank’s press conference, Mr Carney said the squeeze in real incomes was “not all because of Brexit”, because pay growth had been weak for several years. But he said wages were falling partly because firms are worried about trading prospects outside the EU, causing them to offer “more modest pay settlements”.
The alarm over family incomes was sparked by the Bank forecasting that average weekly earnings will rise by just 2 per cent in 2017 – way down on the 3 per cent it expected in February. At the same time, it said it now expected that inflation will hit 2.7 per cent this year, rather than 2.4 per cent. Matt Whittaker, chief economist at the Resolution Foundation, said: “Pay is now expected to be £320 lower this year than was predicted just three months ago, and more than £900 lower than the Bank thought this time last year. The pay squeeze we’re currently experiencing is set to continue throughout the year, resulting in a renewed phase of living standards stagnation over the coming years.”
Although the Bank left interest rates on hold at their record low of 0.25 per cent, it hinted that they may need to rise sooner than anticipated if inflation continued to overshoot its target. It was more rosy about future years, suggesting wage rises will pick up to 3.5 per cent in 2018 and to 3.75 per cent in 2019, outstripping inflation in both years, as the slack in the economy is used up. The dire predictions about pay follow a series of downbeat economic figures in recent weeks.
The Society of Motor Manufacturers announced new car sales had slumped by 19.8 per cent year-on-year in April, while the Bank of England reported last month that mortgage approvals dropped to a six-month low in March, the second drop in a row. Senior Tories told The Independent that the economic indicators were a factor in Theresa May calling the election, hoping to secure an increased mandate before people feel the squeeze.