Britain gets a pay rise as wage growth steps up a gear

Economists predict average weekly earnings, including bonus payments, grew by 3.3 per cent in the three months to May compared with a year ago.

The rise is significantly higher than the annual growth of 2.7 per cent in the three months to April and would represent the strongest expansion since 2010, when a rebound in bonus payments saw wages grow briefly above 4 per cent.

According to The Telegraph, record low inflation in recent months means in real terms, the boost is even bigger. The gap between wage growth and inflation, which stood at just 0.1 per cent in May, is expected to climb to 3.2 per cent – its widest since September 2007.

“With consumer prices inflation still hugging zero, real wage inflation of 3 per cent year-on-year is very robust and great news for consumer spending growth,” said Alan Clarke, an economist at ScotiaBank.

Last month’s data showed private sector pay is already growing at a pace of 3.3 per cent. Stripping out bonus payments, pay is expected to rise by 3 per cent, representing the strongest expansion since January 2009.

While economists cautioned that the massive jump in pay growth was mainly driven by the effect of a sharp fall in bonuses in February dropping out of the calculation, most expect wages to continue rising at a consistent pace of 3 per cent by the end of this year, slowly moving towards pre-crisis growth of 4.5 per cent by 2017.

Samuel Tombs at Capital Economics, said: “I think pay growth around 3 per cent is sustainable for the next couple of years, with the risks mostly to the upside given that most recoveries have tended to see above average growth in productivity.

Given how strong business investment has been over the past couple of years, there’s scope for it to come back quite strong.”

Experts said stronger productivity growth, which has been described as “missing piece” of Britain’s growth puzzle, is the key to unlocking higher living standards.

Stephen Nickell, an economist at the Office for Budget Responsibility (OBR), Britain’s fiscal watchdog, has described predictions for stronger productivity growth as an “act of faith”.

Last week’s Budget presented a mixed outlook for wages, with pay caps of 1 per cent for around 5m workers in the public sector restraining wage growth until the end of the decade. The Institute for Fiascal Studies (IFS) warned that the cap could lead to a talent drain as workers look for higher paid jobs in the private sector.

The OBR said its judgment that productivity growth would recover to pre-crisis growth rates was a “key” one. In its latest forecast, the OBR said: “If productivity fails to recover as predicted but wage growth continues to accelerate, the MPC could be forced to raise interest rates more quickly, which could in turn have a negative impact on consumer spending and housing investment. Alternatively, lower productivity growth could mean that wage growth falls short of our forecast.”

The Chancellor’s decision to set a new national living wage has also come under fire. While George Osborne claimed “Britain’s pay rise” would offset cuts to tax credits, analysts were less certain.

“At best this looks to be optimistic thinking and represents a major gamble,” said Andrew Goodwin, an economist at Oxford Economics.

Britain’s unemployment rate is expected to remain at 5.5 per cent in the quarter to May, with slower employment growth reflecting a tighter labour market. Inflation, meanwhile, is forecast to have fallen back to zero in June.

Stronger pay growth will raise speculation that the Bank of England will begin pondering interest rate rises. While some policymakers, including Martin Weale and Ian McCafferty, have hinted that they could start calling for rates to rise from a record low of 0.5 per cent in the coming months, Andy Haldane, its chief economist, has said the recent surge in pay was not a sign that the economy is starting to overheat. “Wage growth is causing some fluttering, but not in this dovecote,” he said in a speech last month.

Economists said it was unlikely that the Bank would start raising rates this year. “We don’t need to stamp on the brakes immediately,” said Peter Dixon, an economist at Commerzbank. “In early 2016, once we start see to see the CPI inflation rate back to 1 per cent is when the Bank will probably think about starting to pull the trigger.”