MNI DATA ANALYSIS: UK Wage Growth Could Breach 3%-Mark Ahead

--Base Effects, New Year Pay Round Effects to Drive AWE Growth Higher 

     LONDON (MNI) - UK nominal wage growth looks set to top 3% in the coming

months and in turn drive domestically generated inflation, broadly missing from

the current inflation landscape to date, higher. 

     Any uptick in headline earnings will be down to two factors. Firstly, a

favourable base effect from the lower than normal earnings data between December

2016 to March 2017, which will form the comparative baseline for the upcoming

month's figures. The other will be the integration of elevated pay award

settlements since the turn of this year, breaking higher from the stagnant

growth in pay seen in recent years.  

     MNI calculates that the favourable base effect alone could see headline

wage growth tick up 0.2-0.3pp over the next three months. Earnings growth slowed

in the final month of 2016 and remained weak for the subsequent three. Since

earnings data are calculated on a year-over-year basis, the lower than normal

baseline will therefore inadvertently boost this year's figures.  

     If weekly earnings this January, February and March grow at a pace in line

with their respective 10-year average m/m rate, nominal earnings growth could

pick up from 2.5% 3m y/y in December to 2.7% in January, 2.8% in February before

edging back down to 2.7% in March, shown in table 1 below. 

     Table 1 - MNI projection for headline wage growth, excluding 2018 pay award

growth effect 

            Nov  Dec  Jan-  Feb-  Mar-  Sep-  Oct-  Nov-  Dec-  Jan-  Feb-  Mar-

            -16  -16    17    17    17    17    17    17    17    18    18    18

--------------------------------------------------------------------------------

Weekly

Earnings

(stg)       500  498   499   499   502   510   510   511   512  513*  513*  514*

Single

Month

Change %

y/y         2.9  1.9   1.8   2.7   2.4   2.8   2.4   2.3   2.8  2.9*  2.8*  2.3*

3m Average

Change %

y/y         2.7  2.5   2.2   2.1   2.3   2.3   2.5   2.5   2.5  2.7*  2.8*  2.7*

     Source: ONS, Data compiled by MNI   

     * Projections made by MNI 

     Supplementing this will be the isolated effect of stronger pay settlements

negotiated since the turn of the year (typically, January through to April are

the months where the bulk of yearly pay negotiations take place), picked up

already by multiple salary surveys this year. 

     --SURVEYS SUGGEST PICK-UP

     Data from January saw XpertHR's measure of median pay awards climb to 2.5%,

a level last seen in October 2013 (see figure 1), while the Recruitment and

Employment Confederation (REC) jobs survey highlighted the rate of starting

salary inflation hitting a 31-month high. 

     In addition, February's Bank of England Agents' summary report reported

companies' expectations of average pay settlements, a strong leading indicator

of earnings growth, rising to 3.1% in 2018, across all private industry sectors

(see figure 2). 

     Given the Bank's monetary policy is forward looking, it likely places more

importance on pay settlement intentions data from the likes of XpertHR and its

Agents' summaries compared to the lagged wage data from the Office of National

Statistics.  

     Pay pressures in the public sphere are growing too. Last year saw the 1%

pay award lifted, and from April 1 this year selected employees, like police

staff, will see their salary rise by an amount above this threshold.  Prior to

the implementation of the pay cap in 2013, pay was frozen for two years.     

     Should this survey data filter through to the official numbers as expected,

it is reasonable that wage growth could head towards the 3%-mark sometime in the

next few months, crucially just before the Bank releases its next quarterly

Inflation Report on May 10. 

     All other labour market indicators point to a general tightness and a

steepening in the Philips curve. Vacancies sit at a record high, reinforced by

the highest level of recorded recruitment difficulties since 2004 (see figure

3). The unemployment rate, though unexpectedly up 0.1pp to 4.4% in December,

sits close to the Bank's revised estimate of the equilibrium rate (4.25%) - the

rate consistent with meeting the inflation target in the medium term. 

     Generally, the residual level of slack within the economy seems sparse, and

that is certainly the view taken by the Bank (they see it at just under 0.25% of

GDP). Should wage growth accelerate in the coming months it may be the final

signal needed before resuming the current rate hike cycle.   

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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