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Abu Dhabi, UAEThursday 26 April 2018

UK wages rise faster but property to remain out of reach for young

Salary data may reinforce speculation that the Bank of England (BOE) will raise interest rates again next month

Salaries are rising faster in the UK although inflationary pressures may build.David Paul Morris/Bloomberg
Salaries are rising faster in the UK although inflationary pressures may build.David Paul Morris/Bloomberg

UK wages are rising at their fastest pace in almost three years, raising the prospect of an end to the squeeze on living standards.

Annual pay growth excluding bonuses accelerated to 2.8 per cent in the three months through February, the Office for National Statistics (ONS) said Tuesday. Consumer-price inflation averaged 2.9 per cent in the same period and is forecast to fall toward 2 per cent this year.

The figures may reinforce speculation that the Bank of England (BOE) will raise interest rates again next month, despite the economy being disrupted by bad weather in the first quarter.

Officials fear home-grown inflationary pressures are building as labour shortages leave firms struggling to fill vacancies.

Employment rose to a record high between December and February after the economy added 55,000 jobs, the ONS figures show. The jobless rate fell to 4.2 per cent, the lowest since 1975 and below the BOE's estimate of the equilibrium rate.

The prospect of a return to real-income growth is good news for hard-pressed households after more than a year of wages lagging behind prices. Using a measure of inflation that includes owner-occupier housing costs, pay growth overtook inflation between December and February.

Few, however, expect any immediate effect, with consumer spending - and the economy as a whole - forecast to see the weakest growth in years in 2018.

Private-sector regular wages rose an annual 2.9 per cent in the latest three months, and were up 3 per cent in February alone.

In February, the jobless rate fell to an all-time low of 4 per cent. Unemployment dropped by 16,000 to 1.42 million in the latest three months and the inactivity rate declined to a record low.

But while a May rate increase is all-but priced in by investors, not everyone is convinced that the labour market is running out of slack.

A study co-authored by former policy maker David Blanchflower argued this week that there are still a significant number of people seeking more hours, meaning unemployment may have to fall below 3 per cent before wage growth picks up any serious traction.

The wages news came as a report by the Resolution Foundation predicted that falling UK home ownership rates mean a third of millennials will spend their lives in rented housing.

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Up to half of the generation will be renting - either privately or in the public housing sector - into their 40s, with a third still not owning a home by the time they claim their pensions, Resolution said in research published Tuesday. The think tank calculates such a pattern could see the UK’s housing benefit bill for pensioners double to £16 billion (Dh84.2bn) by 2060 from £6.3bn today.

The report showed that, at the age of 30, four in 10 millennials live in private rented accommodation, double the rate for the previous generation and four-times that of baby boomers. A record 1.8 million families with children also rent privately, up from 600,000 just 15 years ago, the report said.

“Britain’s housing problems have developed into a full-blown crisis over recent decades and young people are bearing the brunt - paying a record share of their income on housing in return for living in smaller, rented accommodation,” said Lindsay Judge, senior policy analyst at Resolution. “For any housing strategy to be relevant and effective for people of all ages, it must include this combination of support for renters, first time buyers and ultimately a level of house building that matches what the country needs.”

At the end of 2017 there were 11,000 units of build-to-rent properties under construction, nine percent more than the end of 2016 and 140 per cent more that the average year-end level in the eight years through 2009 to 2016, according to data compiled by Molior London.

That report came as the pound has become the best-performing major currency this year, and some investors are positioning for further gains.

Sterling touched its highest level against the dollar since the UK voted to leave the European Union, with currency bulls supported by seasonal flows traditionally seen in April, the dollar’s weakness and money-market traders betting on a Bank of England interest-rate increase next month. It could get another boost after labour-market data showed the quickening of wage increases.

“A close above this level will set off more alarm bells to buy,” said Neil Jones, head of hedge-fund sales at Mizuho Bank. “Earnings data will be key too. Any sign of further real-wage growth is a textbook positive for a currency.”

With under a month until the BOE makes its next policy announcement on May 10, the market is pricing an 86 percent probability that the central bank will lift borrowing costs.

The pound gained 0.2 per cent to $1.4365 as of 9:11am in London after touching $1.4377 earlier, the highest since June 24, 2016. It was little changed at 86.31 pence per euro.