ONS record growth in wages shows UK ‘in a state of flux’ – reaction from finance and other experts

by | Aug 15, 2023

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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, the latest 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 IFA Magazine as follows:

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.”

 

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.”

Danni Hewson, head of financial analysis at AJ Bell, comments:

 

“Workers will be delighted by the latest jobs data which shows that wages are finally at a tipping point. After months and months of agonising as swelling pay packets simply couldn’t keep up with scorching price rises, the gap between the two has almost vanished.

“For those in the private sector the switch has already been flicked, easing the pressure on households and on employers desperate to keep hold of skilled staff.

“And there’s every indication that prices have continued to cool. With new data due out tomorrow we should get a real insight into how all our finances are shaping up for the rest of the year.

 

“The question for the Bank of England is how much pressure will remain on companies to offer inflation busting settlements and how will employees react to their change in fortunes.

“For many households a few extra pennies are unlikely to make a real difference to living standards, especially those with increased mortgage or rental payments. 

“Most people have been left badly bruised by the impact of increased costs for life’s necessities like power and food. Even if inflation is falling and wage increases are finally making a material difference, prices are still historically high and in the most part show no signs of falling any time soon.

 

“And more cracks are appearing in the labour market. Unemployment has ticked up by more than had been anticipated as economic uncertainty impacts growth plans and sounds the death knell for wounded companies like Wilko.

“Vacancy numbers keep falling, and looking at July’s payroll data it does appear that softening in the labour market is cooling wage growth.

“But there seems little doubt that interest rates will have to rise again next month and market expectation for a further quarter percentage point hike in November has shot up off the back of today’s jobs data.

“For the government there are still huge wounds that need tending. The number of people signed off on long term sick leave has hit another record high and the age-old issue of re-skilling those out of work for more than six months is as acute as ever.

“There are jobs to be had that need filling if the pledge to get the economy growing significantly is to be met, but big questions remain about how that can be achieved.”

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.”

Ben Keighley, founder of social media recruitment specialist Socially Recruited commented: “The belt that has been wrapped around the UK’s labour market for months is starting to look very frayed. 

“A rise in unemployment – to above pre-Covid levels – has already forced it to loosen a notch, and substantial pressures remain. 

“Record growth in average pay now means workers are finally getting enough in their wage packets to offset the rise in living costs but these levels feel unsustainable. They are being pushed by the shift in the balance of power towards employees who know that while some companies may not be taking on more staff right now, they do not want to lose those they have. 

“Longer-term recruitment freezes will thaw as inflation comes back under control, and despite the numbers on long-term sickness hitting a new high, the rise in the economically inactive looking for work will drive employment growth in the months ahead.

“Although vacancies have continued to dip there are still over a million roles to fill, fuelling the battle for talent.” 

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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