UK wage growth remains well ahead of inflation

UK wage growth remained at its post-crisis high at the end of last year, as employment rose but productivity softened.

The ILO unemployment rate for the three months to end-December remained at 4.0%, the Office for National Statistics revealed on Tuesday, as expected. For women, the unemployment rate dropped below 4% for the first time ever.

Numbers in employment increased by 167,000 compared to the preceding three-month period, higher than the 151,000 expected. Recent surveys have shown a marked deteriorated in January, however.

The ONS said the number of people in work has reached a record high of 32.6m, though it is estimated that more than 800,000 workers are on zero-hours contracts.

More timely numbers were released by ONS about the claimant count in January, showing it remained at 2.8%, while jobless claims in January increased 14,200 after a 20,200 increase in December.

Weekly wage growth held steady at the post-crisis high of 3.4% reached in November, both including and excluding bonuses. Including bonuses, the market had expected growth of 3.5%, though the ex-bonus figure was in line with estimates.

This is well above the current rate of inflation, with the consumer price index having been shown earlier this month to have fallen to 1.8% in January from 2% in December.

"With surplus labour extremely scarce and job vacancies rising to a new record high, workers are having more success in obtaining above-inflation pay increases," said economist Samuel Tombs at Pantheon Macroeconomics. Following recent surveys, including from the CIPD this week, and the main rate of the National Living Wage due to rise by 4.9% in April, Tombs predicted wage growth will remain above 3% for 2019.

Economist Andrew Wishart at Capital Economics agreed, adding that "households are well placed to ramp up their spending if and when Brexit uncertainty lifts", even though recent surveys suggested there might be a "Brexit effect" on employment numbers in the next batch of official data.

Productivity remained weak, falling 0.2% year-on-year in the fourth quarter, with growth in productivity per worker slowing further from 0.4% in the third quarter to -0.1% in the fourth. Productivity has risen only 0.2% per year since 2007, compared to 2.3% average in the previous 30 years.

With productivity under pressure as the economy slows but employment growth picks up, Wishart said that, combining this with strong pay growth, inflation should be forced up in the medium term and this will be a strong influence on the Bank of England's monetary policy committee.

"The upshot is that in contrast to the market implied probability of just a 28% chance of a single 0.25% hike this year, we think the MPC could hike rates twice in the second half of the year if a Brexit deal is struck."

Tombs felt the data will only persuade the MPC to press ahead with one rate rise before the end of this year.

ONS senior statistician Matt Hughes said: “Most of the growth in employment over the past year is among British nationals. However, the number of overseas nationals in work is still rising, despite a drop in the number of so-called ‘A8’ workers, due to more people from non-EU countries being in work.”