Carney's Optimism on U.K. Wage Growth Challenged by Report

  • EY Item Club sees first decline in job creation since 2009
  • Joblessness to rise and real wage growth will be ‘negligible’

Mark Carney.

Photographer: Andrew Harrer/Bloomberg

Britons face a “rockier” labor market in the coming years that’s going to limit an improvement in wage growth, according to EY Item Club.

The forecasts published Monday are in contrast to the medium-term outlook presented by Mark Carney last week. While the Bank of England governor warned of a “challenging” 2017 for workers as inflation outpaces pay gains, the BOE sees a pickup from later this year, with wages growing close to 4 percent in 2019. In contrast, EY sees “negligible” real wage gains with nominal improvements of less than 3 percent right through 2020.

A separate survey by the Chartered Institute of Personnel and Development published on Monday was even more pessimistic on wages, indicating employers intend to raise basic pay in the year ahead by just 1 percent.

EY blames its gloomier outlook on a slowing economy and lower demand for workers. That will cause the first annual drop in the number of people being hired since the financial crisis, stagnating real pay growth and greater joblessness, the economic forecasting group said on Monday.

Despite softer growth, the pound’s drop since the Brexit vote means the U.K. is facing a sharp inflation pickup. Data on Tuesday is forecast to show that prices rose an annual 2.6 percent in April, the strongest since 2013. A day later, the worsening squeeze on workers will be highlighted in figures expected to show wage growth stuck at 2.2 percent in the first quarter.

The BOE kept its benchmark interest rate at a record-low 0.25 percent last week, though it warned that inflation will rise faster this year than previously predicted. EY Item Club said the softer labor outlook supports the central bank’s cautious on tightening. Carney said he expects real wage growth will eventually pick up, but that there would be “consequences” if it doesn’t.

Another Challenge

The case “to keep monetary policy on hold for a prolonged period is a strong one,” said Martin Beck, the group’s senior economic adviser. Weak pay growth will “present another challenge for whoever takes the reins of economic policy after the election.”

The uncertain outlook means that, having risen by 1.4 percent in 2016, the number of people in work will increase only 0.6 percent this year, before falling 0.1 percent in 2018, the first drop since 2009, EY Item Club said. The jobless rate will rise 4.7 percent to 5.4 percent in 2018 and 5.8 percent in 2019, it said.

The CIPD’s quarterly survey of 1,000 companies suggested Britons face slowing wage growth, with employers’ median basic pay expectations in the 12 months to March 2018 dropping to 1 percent compared to 1.5 percent three months ago. That’s the lowest its been for 3 1/2 years.

“There is a real risk that a significant proportion of U.K. workers will see a fall in their living standards as the year progresses," Gerwyn Davies, labor market adviser at the CIPD, said in a statement. “This could create higher levels of economic insecurity and could have serious implications for consumer spending."

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