UK pay growth will accelerate and jobless rate will hit fresh lows, insists Bank of England’s Michael Saunders
Michael Saunders, a member of the Bank of England’s monetary policy committee, has insisted that UK pay growth will accelerate this year as the labour market tightens.
Though subdued, he predicted the rise in the size of UK pay-packets would also be likely to overshoot consensus estimates to rise to three per cent year-on-year in 2018.
Added to that, despite bodies such as HM Treasury, Consensus Economics and the International Monetary Fund (IMF) predicting that the decline in unemployment is now probably over, he said he had a “hunch” that the jobless rate would drop to four per cent this year – and possibly lower.
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“To be sure, recent data show a slight drop in employment over the last three months. However, wider labour market trends do not look weak in my view,” Saunders said at the launch of Financial Intermediary and Broker Association in London.
“For example, surveys suggest that firms’ hiring intentions are slightly above average, while the level of job vacancies is around a record high.”
Saunders said that the economy would probably grow at between 1.5 per cent and two per cent in the near-term, though consumer spending would likely remain “sluggish”.
Headwinds include the expectation that Brexit would knock the economy, which is slowing household and business economic activity.
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But he noted global growth was “buoyant”, supporting UK exports, corporate and household balance sheets have improved, and drivers are in place for an upturn in business investment.
“Balancing out the positives and negatives, the near-term outlook for the economy is not great, but nor is it terrible,” said Saunders.
Brexit effects
Brexit does seem to have affected the number of EU workers willing to come to work in the UK. Saunders even said that he “would not be surprised” if the net inflows of foreign workers turn negative.
This would mean the existing labour force would have to pick up productivity growth to maintain economic growth, and “there is little sign of this at present”, Saunders said.
But he added: “I do not believe that the UK is inevitably locked into persistent low productivity growth. Technological innovation remains high and there is ample scope for UK productivity to catch up to the higher levels elsewhere, for example, the US and Germany.”
He concluded that if pay growth did pick up, interest rates “will need to rise further over time”.
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