By Dow Jones Business News, October 16, 2013, 05:05:00 AM EDT
UK Wage Squeeze Continues
LONDON--Wages in the U.K. rose at the slowest pace on record in the three months to August, tightening a squeeze on
household incomes that will weigh on the economic recovery.
Consumer spending accounts for around 60% of the U.K.'s economic output, meaning the erosion in spending power could
have a major impact on prospects for a sustained and strong recovery.
Regular wages, which exclude bonus payments, grew 0.8% in the three months to August from the same period in 2012,
equaling the lowest rate since records began in 2001, according to the Office for National Statistics. By comparison,
the annual inflation rate was 2.7% in August, meaning many Britons took a pay cut in real terms.
"This poses a significant hurdle to the economy reaching escape velocity in the near-term," said Rob Wood, chief U.K.
economist at Berenberg Bank. "With spending power heavily squeezed, this recovery has been driven by consumers spending
more and saving less, taking out credit to buy cars and, increasingly, mortgages to buy houses."
U.K. gross domestic product growth more than doubled in the second quarter to 0.7% from 0.3% in the first, which
Chancellor of the Exchequer George Osborne said vindicated his austerity push. Expectations are for a further, albeit
slower acceleration in the third quarter. The latest calculation from research group the National Institute of Economic
and Social Research showed third-quarter GDP is forecast to grow 0.8% on the quarter.
But the squeeze on incomes is shaping up to be a battleground in the general election due to be held in 2015.
The main opposition Labour Party has pledged to freeze energy prices if it wins the election--a promise that proved
popular with many voters, according to opinion polls. The government has offered to freeze tax on gasoline, proposed a
tax credit for married couples, and has introduced a plan to help families get mortgages.
A labor market report also released Wednesday showed the number of Britons out of work fell 18,000 in the three months
to August, leaving the unemployment rate unchanged at 7.7%. Economists had forecast the rate would fall to 7.6%.
The unemployment rate has become a key indicator for the future path of monetary policy after the Bank of England in
August said it would wait until the unemployment rate falls to 7% before it would consider raising the interest rate
from the record low level of 0.5%. This pledge is conditional on forecasts for annual inflation and the stability of the
BOE Governor Mark Carney said the benchmark rate is likely to stay at 0.5% until 2016. Markets, encouraged by some
signs of an economic recovery, are betting the BOE will have to raise rates sooner to contain inflation, which has run
above the central bank's 2.0% target for most of the past few years. Forward contracts tied to sterling money-market
rates price in a near 66% chance of a 0.25 percentage point rate increase in December, 2014.
In the text of a speech released Wednesday, BOE Chief Economist Spencer Dale said the central bank won't raise its
benchmark interest rate until the economy returns to strong growth and rising employment, but also "rising incomes."
"The worry is that any hike in interest rates before real incomes start to revive would set the economic recovery back
significantly, as rising demand for staff is still not feeding through to higher wages," said Chris Williamson, chief
economist at data firm Markit.
The ONS said the more timely claimant count, which measures the number of people receiving the Jobseekers Allowance
benefit, fell 41,700 in September to reach 1.35 million--the biggest monthly fall since June 1997.
The claimant count rate fell to 4.0% from 4.1% in the previous month.
Economists said the fall in the claimant count indicates the overall unemployment rate could fall to 7.6% in coming
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