Wage rises a positive sign for overall UK economy
Chris Williamson, chief economist at Markit, has commented on the latest UK labour market data from the Office for National Statistics.
He said: “A surge in UK wage growth brings welcome news that the economic recovery is feeling through to pay packets, but also ups the odds of interest rates rising this year.
“Regular pay was 2.7% higher than a year ago in the three months to April, up from 2.3% in the three months to March and its fastest rate of increase since early 2009. Including bonuses, the rate of increase also accelerated from 2.3% to 2.7%.
“Wage growth is showing signs of reviving as the labour market continues to tighten. The unemployment rate stood at 5.5% in the three months to April, its lowest since 2008, as joblessness fell by 43,000.
“Employment increased by 114,000 in the latest three months, representing a slowdown in the pace of job creation but taking the employment rate up to 74.3%. Business surveys also point to ongoing robust job creation in May.
“It’s uncertain as to how much pay growth will continue to accelerate, as low inflation – currently running at just 0.1% – will hold down annual pay reviews. However, wage pressures have already built to an extent that would normally start to worry policymakers.
“Private sector pay excluding bonuses rose at an annual rate of 3.2% in the three months to April, the best seen since 2008. Service sector pay rose at an annual rate of 2.9% in the latest three months, the highest since early 2009, with a 3.6% rate seen in financial services and 3.9% in retail, hotels and restaurants. Construction pay growth rose to a post-crisis high of 4%. Manufacturing pay growth lagged behind at 1%, though even here the pace has picked up markedly since the start of the year.
“The upturn in the labour market and low prices have boosted consumer confidence, with households feeling the most positive about their finances since the financial crisis. Consumers therefore look likely to continue to help drive the economic upturn in the coming months.
“Some policymakers will therefore be getting increasingly twitchy trigger fingers given the encouraging news on pay growth, and a chance of a rate hike this year has risen substantially.
“The argument to hold off with higher rates will be led by calls that more time is needed to assess whether a recent slowdown seen across the economy is only temporary or the precursor to a renewed weak patch. The key take-away is that, if the pace of economic growth revives, as widely expected, the recent upturn in pay takes away the main remaining argument to hold off with raising interest rates, and pressure to tighten policy looks set to build significantly as we move into the second half of the year.”
Andy Scott, associate director of FX advisory services at foreign currency specialists HiFX, has also commented on the new ONS data.
He said: “Sterling jumped higher on Wednesday following stronger-than-expected wage growth for April that could prompt the Bank of England to consider raising rates a bit sooner than the first half of 2016.
“While inflation is basically non-existent in consumer prices, the increasing pace of pay rises risks stoking inflation as the spending power of households increases and firms potentially look to cash in by raising prices. However, rising wages are a very good sign for the overall economy; it shows that the situation is starting to normalise, and that employees feel more comfortable about asking for pay increases after five years of wages falling in real terms.”
