Today’s record increase in wages has implications for markets and economy – reaction from experts

by | Aug 15, 2023

This morning’s announcement from the ONS that wages in the UK grew at a record rate in Q2 with regular wages growing by 7.8%, the highest since records began back in 2001. With the latest UK inflation data due out tomorrow, today’s wages and jobs data clearly has implications for investment and advice professionals – as well as the Bank of England’s MPC considering whether to hike rates again next month.

Experts have been sharing their reaction to today’s ONS news about record wages growth with Wealth DFM as follows:

Richard Carter, head of fixed interest research at Quilter Cheviot said:

“While it is premature to call the beginning of the end of the UK’s cost-of-living crisis, the pressures are showing signs of easing. On the eve of an inflation print that is expected to reveal a marked fall, this morning’s labour market statistics show wages might be growing faster than prices for the first time in almost two years. 

“Wages have been rising consistently in an attempt to keep up with inflation, and employee regular pay (excluding bonuses) reached 7.8% in April to June 2023, the highest regular annual growth rate seen since records began in 2001. Average total pay (including bonuses) rose to 8.2%, though this growth rate was affected by NHS one-off bonus payments made in June. While wage growth tends to be a lagging indicator and we may therefore begin to see a slowdown in the coming months, for now, despite inflation falling, the increase continues.

“The UK labour market remains relatively tight, as the CIPD’s report this week showed increased employer dependency on counter-offers in a bid to persuade staff with job offers elsewhere to stay put. However, this morning’s jobs data reveal the employment rate saw a slight downtick of 0.1 percentage points lower than January to March 2023, estimated at 75.7% in April to June 2023. Meanwhile, the unemployment rate increased by 0.3 percentage points on the quarter to 4.2%, though the rate of economic inactivity continued to fall, dropping by 0.1 percentage points to 20.9% in April to June 2023.

“The Bank of England will be studying this week’s data carefully, but even if inflation falls as expected in tomorrow’s CPI print following a drop in energy prices, the inflationary pressure of still rising wage growth means the Bank is unlikely to put a halt on further rate rises just yet. What’s more, even if inflation does come in lower than wage growth tomorrow, very few people will feel any real benefit. Rising mortgage rates and high everyday costs continue to put a strain on personal finances, particularly as lower inflation will take some time to feed through to the prices people are paying.”

Adrian Lowery, financial analyst at wealth manager Evelyn Partners, comments: “Average earnings growth excluding bonuses, which had been expected to tick up to 7.4% in the quarter through June from 7.3% in the previous three-month period, is now the highest on records going back to 2001.

“This above-expectations wage growth will be watched nervously at the Treasury as it threatens to add fuel to the triple lock fire. The wages element of the triple lock – annual earnings growth for May to July – won’t be available until next month but this outcome suggests it could be significant. Moreover, strong wage growth is likely to impair the retreat of inflation in the coming months, and the Bank of England recently warned that the pace of wage growth is a threat to its longer-term inflation target of 2%.

“While the consumer prices index for July due tomorrow is widely expected to show a fall in the headline annual inflation rate, there are reported fears in Whitehall that subsequent months could reveal a plateau or even a tick back up in the rate. The inflation reading for September, or a possibly even-more racy wage growth figure, will determine what could be a very substantial rise in the state pension and reignite the debate over whether the triple lock is sustainable.

“The cost of the state pension is already expected to outweigh combined spending on education, policing and defence in the next two years. With neither of the leading parties yet willing to question the affordability of the triple-lock in the run-up up to a General Election, this could intensify the squeeze on the public finances.”

Isabel Albarran, Investment Officer at Close Brothers Asset Management is also looking ahead to tomorrow’s inflation data as she comments:

“Inflation is heading in the right direction, but wage growth is lagging. Today’s data showed that even as unemployment increased by 0.2% to 4.2%, wage growth accelerated to record levels of 7.8%, the highest rate seen since 2001. While payroll numbers rose more than expected, vacancies, redundancies and survey based measures of employment all point to the job market easing.

“We don’t believe the persistence of strong wage growth should worry the MPC. Wage growth regularly lags both inflationary trends and labour market dynamics, and we expect to see significant easing later this year. While we don’t think the Bank of England is finished hiking yet, the fact that unemployment is close to Bank estimates of the equilibrium rate a year earlier than the Bank forecast should give MPC members greater confidence.”

Steven Cameron, Pensions Director at Aegon believes that state pensioners could be the winners as he comments:

“Official figures show that earnings growth has now overtaken price inflation. This may bring some relief for those who have secured a pay increase at or above the national average, but the millions paying far higher interest on their mortgages will see that more than cancelled out.

“One group with a keen interest in how this unfolds are state pensioners. Under the triple lock, state pensions are increased annually in April by the highest of earnings growth, price inflation or 2.5%. The earnings growth figure used is the year-on-year increase for the period May to July, published mid-September. The inflation figure used is the year-on-year increase till September, published in mid-October. Both are currently well above 2.5%. The latest earnings growth figure is 8.2%, now above the latest inflation figure of 7.9%. If the earnings growth figure announced next month stays at this level, this guarantees state pensioners 8.2% next April, even if inflation continues to fall.

“The triple lock has come under intense scrutiny in recent years because of the volatility in earnings growth during the pandemic, and more recently because of sky-rocketing inflation, which reached double figures late in 2022 and has remained stubbornly high. In April 2022, the Government suspended the earnings component because of furlough distortions, meaning state pensioners received an increase based on the previous September’s inflation of 3.1% which was around half the level inflation had risen to by April 2022. In April 2023, particularly high inflation meant state pensioners received a double digit increase of 10.1%.

“If earnings growth remains above price inflation in the coming months, state pensioners may be winners, particularly as they are less likely to be affected by rocketing mortgage costs and could also be benefitting from higher interest rates on cash savings.”

Julia Turney, Partner at independent professional advisory consultancy Barnett Waddingham, said: “The UK’s labour market is in a state of flux. Unemployment figures have escaped largely unscathed from the recession scares of recent months, meaning few people are job-hunting. But more than a quarter of working-age Brits aren’t working or looking for work at all; they are ‘economically inactive’ due to sickness, disability, and caring responsibilities.

“For business, this means the labour market is tight – most people who want jobs have them. This, combined with the cost-of-living pressures facing consumers, means wages are climbing, and are set to surpass inflation altogether later this week. The CIPD has revealed that almost half of UK employers have made counteroffers in the last year to try to keep staff – it’s clear that the war for talent is back on, and the battleground is salaries.

“But this upwards spiral is not sustainable. If wages continue to rise, so will inflation – labour costs will increase, and so in turn will prices. To break the cycle, the responsibility is on businesses to create an environment where staff are both fairly paid and highly valued. Organisations must take a planned holistic approach which goes beyond just cash remuneration – it should include benefits, culture, and wellbeing. Most employees who stay in their role do so because they love the work and the culture, and many who leave dislike the work and team. Employers who tackle this problem head-on will be able to not just compete in the war for talent, but shift the battle entirely.”

Derrick Dunne, CEO of YOU Asset Management, commented: “Encouraging as it may be that employment continues to come down, the ONS has reported that average pay increased by a new record of 7.8% in the three months to June. This could have major implications for both inflation and interest rates.

“With wage growth expected to stay high in light of ongoing labour shortages and a record number of UK workers on long-term sick leave, market expectations are for further interest rate hikes, albeit much less aggressive as we near the end of the hiking cycle.

“We’ve already glimpsed the unintended consequences of monetary tightening being performed at a historically fast pace, so there’s no doubt the MPC will be looking to the economic data released this week, revealing falling consumer spending and a weakening labour market, to determine whether or not existing measures are already working. “As we move through the remainder of 2023, investors should remember that challenging times always bring a mix of risk and opportunity. Having an appropriately diversified portfolio is always the best approach during these times.”

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