DEBATE: Can we relax about the UK economy now that wages are rising faster than inflation?

Morning Commuters As London Strives To Preserve Status As EU Financial Hub
While a strong labour market is driving nominal wages up, they are unlikely to accelerate much further (Source: Getty)

Can we relax about the UK economy now that wages are rising faster than inflation?

Ben Brettell, senior economist at Hargreaves Lansdown, says YES.

It is never a good idea to be totally relaxed about the economy, as events have a habit of taking economists by surprise. This is especially true with Brexit on the horizon.

But I do think the doom and gloom is overdone.

Yes, first-quarter GDP was disappointing, but I agree with the Bank of England that it’s likely to be a blip rather than the start of a worrying trend, or even a recession. Wage growth is unspectacular and likely to remain so until we can sort out the UK’s productivity issues.

But with inflation falling back, real wages are rising, and that should support the consumer sectors. Meanwhile interest rates look set to stay low.

It looks like we’re in the classic “Goldilocks” situation: the economy is not too hot to stoke domestic inflation and force interest rates higher, and not too cold to induce any panic – for now at least.

Read more: Real wages are on the rise, as unemployment drops again

Yael Selfin, chief economist at KPMG, says NO.

This year has so far been a tale of two halves. Preliminary first-quarter output data showed that the UK economy experienced meagre growth. Bad performance was at least partially due to the unseasonably cold weather, and figures may be revised upwards slightly, but PMI surveys for April pointed at a soft start to the second quarter as well.

At the same time, figures for the UK labour market show the employment rate reaching its highest ever in the first quarter. So it feels like once again, performance of the UK labour market and real output are not in sync.

While a strong labour market is driving nominal wages up, they are unlikely to accelerate much further.

Subdued productivity performance could see real wages rise by not much more than one per cent over the medium term, even once inflation comes further down to its two per cent target.

This will add less fuel to consumer spending than in previous years, and coupled with the uncertainties around Brexit, will see more modest growth in the UK.

Read more: Economic uncertainty is putting Brits off buying cars

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles