Photographer: Simon Dawson/Bloomberg

Are U.K. Wages Set to Accelerate?


Investors wondering whether the U.K.'s underwhelming wage numbers are a blip or a trend can't rely on the Bank of England to provide the answers. 

While the central bank revised down its earnings-growth forecasts in February, it still sees an acceleration to 3.75 percent by the end of next year, a level not seen since 2010. The BOE's argument is that the tight labor market and productivity growth should support a gradual pickup in pay.

The trouble is, they've been arguing that for a while. In August, their projections showed 3 percent growth in the fourth quarter of 2015. Data on Wednesday showed that figure was actually 1.9 percent.

Key to the debate is explaining why a decade-low unemployment rate hasn't translated to stronger wages and, in turn, stronger price growth. BOE Governor Mark Carney offered little insight at his most recent press conference, telling a journalist that while the central bank is sticking to its central case for a gradual pickup: 

``You know as much as we do about the labor market.''

Other factors that could be at play include a change in the composition of employment, the possibility that there's more slack in the labor market than the BOE estimates or the lagged effect of slower productivity growth. None of these are the BOE's central case, however. 

Many economists agree with the BOE's central message that the factors weighing on wage growth will dissipate.

The BOE's forecast is "ambitious , but it's good to be ambitious," said Alan Clarke, an economist at Scotiabank in London. "It looks increasingly like the soft spot in wages was two rogue months."

The new-year wage round, which in the past has delivered some chunky pay increases, will be key, as will an increase in the minimum wage in April. 

Still, several risks are looming. A referendum on the U.K.'s membership of the European Union, which could come as early as June, might prompt a drop-off in hiring and hit wages, according to ING economist James Knightley. BOE officials have also said they're watching for low inflation creeping into pay settlements, though they say that's not a dominant factor.

"It doesn't make sense for pay to stay at such low levels," Knightley said. "There's going to come a point, a tipping point, whereby it does start to rise."

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