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Britons face smaller pay rises, buttressing central bank's slowdown forecast

Thursday, February 9, 2017 - 00:01

[LONDON] British employers plan to offer the least generous pay deals since 2012 this year, the Bank of England said on Wednesday, underscoring its view that the economy is set to suffer from the effects of the Brexit vote.

The economy surprised investors last year when it outpaced its peers among the world's big rich nations, driven by the spending of households who shrugged off the vote to leave the European Union.

But the pound's fall of more than 15 per cent against the dollar since June's referendum is pushing up inflation and is likely eat into the spending power of many households, the BoE says.

Inflation was running at 1.6 per cent year-on-year in January, its highest since mid-2014, and is projected by the BoE to be running at 2.7 per cent in he final quarter of 2017.

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In a regular survey of 700 businesses across Britain, the BoE said price pressures were building across supply chains, and firms expected inflation to spread beyond food and fuel prices to a wider range of goods and services this year. "Consumer spending growth had remained resilient, but was expected to ease during the year as prices rose," the BoE said, reporting on what it had been told.

The BoE predicted last week the economy as a whole would retain much of its momentum this year and grow by 2 per cent. But consumer spending was likely to start to slow markedly before the end of the year, auguring a slowdown in 2018 and 2019.

Governor Mark Carney said Britain's economy would face many"twists and turns" as it prepared to leave the EU just over two years' time and he gave no suggestion that record low interest rates were likely to rise any time soon.

There have been some recent signs of a slowdown in spending by households. House prices, which are closely linked to consumer confidence, have lost some of their momentum.

However, not everyone at the BoE is convinced that Britain's economy will start to run out of steam.

Kristin Forbes - the most sceptical of the bank's policymakers about the need for its huge stimulus programme - said on Tuesday that August's rate cut might need to be reversed soon if growth remained solid and inflation picked up. "If these trends ... are solidified, it will become increasingly difficult for me to justify tolerating such a large and likely overshoot of inflation," she said.

BoE Deputy Governor Jon Cunliffe, in a speech on Wednesday, said there were both upside and downside risks to the BoE's forecast of a gentle slowdown in growth, and that policymakers would keep a close eye on pay, consumption and inflation.

Currently the BoE forecasts growth in households' disposable income will slow sharply towards the end of this year and in early 2018, but not fall outright in inflation-adjusted terms.

However, the pay intentions reported in the BoE survey on Wednesday raised the prospect that wages will rise less than the 2.7 per cent projected inflation this year.

Firms contacted by the BoE expected to offer pay settlements of 2.2 per cent on average, down from 2.7 per cent in 2016 and the lowest since 2012.

This is less than the 3 per cent growth in average weekly earnings which the BoE predicted last week for late 2017.

REUTERS

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