MNI POLICY: BOE MPC Upbeat On Earnings Growth, Absent Brexit

By David Robinson

     LONDON (MNI) - Bank of England Monetary Policy Committee members see

increasing evidence to support their assumption that earnings growth will

accelerate next year, so long as the economy is not derailed by Brexit.

     In evidence to the Treasury Committee Tuesday, Governor Mark Carney and his

MPC colleagues highlighted the tightness of the labour market, skills shortages

and more rapid jobs churn as factors bolstering pay growth. Brexit is set to

fuel volatility near term but the pay outlook is rosier.

     As MNI has highlighted, one factor on which the MPC places weight is jobs

churn, which has rebounded to near pre-financial crisis levels. The accelerated

job hopping is putting pressure on employers to respond by raising pay for

existing workers in order to retain them.

     -JOB CHURN

     In recent years job churn has been subdued and pay growth for those

sticking in their current jobs has tended to be weak as "employers haven't felt

the need to pay up to retain workers," BOE Chief Economist Andy Haldane said.

     "Over the last six-to-twelve months we have seen that picture altering.

Such has been the tightness of the labour market that companies have felt the

need to up pay for those existing workers just to retain them, given skill

shortages," Haldane said.

     In its November Inflation Report the MPC conditioned its growth and

inflation projections on the assumption average weekly earnings growth would

rise from 2.75% in 2018 to 3.25% in 2019.

     Even Deputy Governor Jon Cunliffe, who has warned that labour market slack

may be greater than assumed, sees signs of pay growth firming.

     Earnings growth struggled had previously struggled to stay above 2.5% but

Cunliffe said that job-to-job flows and other data "all suggest that there is a

firming there" in pay growth.

     "Our forecast has pay moving into the threes next year so this is evidence

that would support the forecast," he said.

     --NET MIGRATION

     The MPC members were dismissive of the view that the headline-grabbing fall

in the number of EU nationals in work in the UK -- down 132,000 in the year to

Jul-Sep in the biggest decline on record -- was another factor adding to upward

pressure on pay.

     Reams of research highlight how little impact net migration has on

earnings, primarily because immigration impacts both supply and demand, often in

roughly offsetting amounts.

     A decline in net migration "would reduce supply and demand equally and by

extension it doesn't have a great implication for monetary policy," MPC member

Michael Saunders said.

     "The reason why pay growth is picking up is not because inward migration is

low, it is because the labour market is tight. The jobless rate is the lowest

for more than 40 years," Saunders added.

     The broader economic picture is being clouded by the Brexit process,

however, as it feeds through to soft business investment and the Bank expects Q4

growth to slow to just 0.3% on the quarter.

     "We do expect some short-term volatility in economic data. There have been

some big swings with softness in retail sales, there have been issues with

investment. This is an unusual quarter," Carney said.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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