Britain’s private sector employers plan to restrict pay awards to 2% over the next year, according to a report that casts doubt on forecasts that a six-year decline in living standards is about to end.
Subdued retail sales in September and the first fall in export orders for 18 months added to the gathering gloom over the state of the economy amid expectations that the first official estimate of third-quarter growth morning will show Britain’s recovery is slowing.
Economists are forecasting 0.7% expansion between July and September, a slowdown from more robust 0.9% growth in the second quarter.
The TUC said it was worrying that the recovery appeared to be faltering even before workers had received a real-terms wage rise.
Although pay rises next year could exceed the consumer prices index, which stood at 1.2% in September, they may fail to beat the generally stronger retail prices index (RPI), the measure of inflation more commonly used in wage negotiations, which showed an annual rate of 2.3% in the same month.
Only sectors such as housebuilding and engineering, where skills shortages have caused recruitment problems, are likely to see a pay rise of more than 3%, the report found. It was based on interviews with 262 employers.
It said: “The majority of employees are unlikely to receive a pay rise that matches inflation. RPI inflation is forecast to be higher than 3% over the course of 2015, and only one pay award in three is expected to match or exceed this figure.”
The TUC’s general secretary, Frances O’Grady, said: “This looks like pay misery without end. Britain needs, but is not getting, a pay rise. But without more spending power in people’s pockets it will be hard to sustain the recovery.”
Private sector workers have fared better in recent years than those in the public sector following a squeeze on wages by George Osborne since 2010.
The chancellor told the Conservative party conference last month he would freeze pay until 2017, prompting a series of strikes in the past two weeks.
The protracted squeeze on pay packets since the financial crisis means the average worker in Britain is already £5,000 a year worse off than in 2008, a leading labour market expert, Prof Paul Gregg of Bath University, warned this month.
Bank of England policymakers are closely watching wage growth, which has been unexpectedly weak in recent months. Economists believe that a combination of slowing growth, low consumer prices inflation (which the Bank officially targets), weak pay growth, and heightened risks from the eurozone will delay the first rise in interest rates until at least the middle of 2015. Rates have been on hold at the historic low of 0.5% since March 2009.
Consumers appeared less willing to spend in the third quarter, with retail sales rising by just 0.3% between July and September. It was a marked slowdown compared with the 1.5% quarter-on-quarter growth in retail sales in the second quarter.
Howard Archer, chief UK economist at IHS Global Insight, said: “It does look like consumers have reined in their spending to some degree after splashing out at a strong rate overall through the first half of the year. This is not that surprising given the overall pressure coming on consumers’ purchasing power from prolonged very weak earnings growth.”
Last month, sales fell more sharply than expected as shoppers put off buying new winter clothes amid the driest September on record. Sales fell 0.3%, according to the Office for National Statistics, disappointing City expectations of a smaller fall of 0.1%. The poor performance was driven by a 7.8% fall in textiles, clothing and shoe sales over the month, as people shunned winter coats and jumpers to bask in the last of the warmer weather.
Alan Clarke, economist at Scotiabank, said the drop in sales was a sign that things were cooling off, but “nothing sinister”. “There is probably a little more cooling off to come, but it is just that – cooling off, not an arctic chill,” he said.
However, a weak manufacturing survey from the CBI reinforced the sense that Britain’s economic recovery is losing steam. A sluggish eurozone economy and a stronger pound pulled export orders lower in the three months to October for the first time in 18 months, the business lobby group said, frustrating government ambitions for a big push in UK exports.
Manufacturing output and orders overall grew at the slowest pace in a year.
Rain Newton-Smith, director of economics at the business lobby group, said: “It’s disappointing that a sluggish exports market has taken some of the steam out of manufacturing growth, which was going from strength to strength throughout most of this year.
“Global political instability, mounting concerns about weakness in the eurozone, and recent rises in sterling are all weighing on export demand.”
The balance of manufacturers reporting a fall in export orders over the past three months fell to -7% in October, the lowest since January 2013. Domestic demand for factory goods was more resilient, with a balance of +14% of firms reporting a rise in orders from within Britain over the past three months. It was, however, the slowest rate of quarterly growth since January.
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