July 17, 2018 / 8:38 AM / 2 months ago

UK pay growth slows to six-month low despite record employment

LONDON (Reuters) - British workers’ wages have risen at the slowest rate in six months despite a record number of people in jobs, challenging the Bank of England as it considers raising interest rates next month for only the second time since the financial crisis.

FILE PHOTO: People cast long shadows in the winter sunlight as they walk across a plaza in the Canary Wharf financial district of London, Britain, January 17, 2018. REUTERS/Dylan Martinez/File Photo

Average weekly earnings increased by an annual 2.5 percent in the three months to May, slowing from 2.6 percent in the three months to April and the weakest growth since November, the Office for National Statistics said on Tuesday.

Pay growth excluding bonuses, which the BoE says sometimes gives a better picture of the underlying trend, slowed by a similar amount, to 2.7 percent. Both readings were in line with the average forecast in a Reuters poll of economists.

Markets took the data in their stride, with the numbers doing little to shift perceptions that the majority of the BoE’s policymakers will vote to raise rates after their next meeting on Aug. 2.

“We see recent labour dynamics, including today’s report, as consistent with the Bank of England pressing ahead with an August rate hike,” said Investec economist Victoria Clarke.

Britain’s economy appears to be picking up after a slow first three months of the year, when unusually heavy snow hurt demand, and the central bank worries that growth is close to the modest pace at which it will start to push up inflation.

Tuesday’s data showed the unemployment rate remained at its joint-lowest since 1975 at 4.2 percent while the proportion of working-age people in employment rose to a record 75.7 percent after 137,000 jobs were created over the three months to May.

But economic growth since 2016’s Brexit vote has been weak by historic standards due to high inflation and business uncertainty, and on Monday the International Monetary Fund cut Britain’s growth forecast for 2018 to 1.4 percent.

BREXIT UNCERTAINTIES

Moreover, the BoE has been repeatedly surprised over the years as the labour market has tightened but wages have risen less than expected - a pattern seen to a slightly lesser degree in most other advanced economies in recent years.

Pay growth is one of the pieces of data the Bank of England looks at most closely for signs that domestic inflation pressures are rising strongly enough for inflation to be at risk of breaching its 2 percent target over the medium term if the BoE does not raise rates in the immediate future.

BoE Governor Mark Carney said at the start of the month that both the economy as a whole and pay were growing as the central bank had forecast in May, smoothing the way for an August rate rise.

But last week one of his deputies, Jon Cunliffe, who opposed November’s rate rise, said pay growth did not seem to be breaking out of its recent 2.5-3.0 percent range and heading towards the 3 percent growth rate that the BoE predicts for the end of the year.

Britain had seen numerous “false dawns” for pay growth in the past, and there could be more spare capacity in the labour market than the central bank thought, he added.

Tuesday’s figures showed average hours worked per employee had fallen, giving scope for a future increase in output.

Investec’s Clarke said slower wage growth probably reflected unusually big increases a year earlier. The BoE said last month that wage growth could slow for a few months before picking up.

In July, more than a million public-sector health workers will receive a pay rise of around 3 percent.

But other economists are less sure pay will accelerate on a lasting basis.

“Low unemployment is yet to generate serious wage pressures and Brexit uncertainties continue to reign,” said Ian Stewart, chief economist at accountants Deloitte.

“The case for raising interest rates in August may have strengthened, but is hardly compelling.”

Editing by Alison Williams and Ed Osmond

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