Double whammy means biggest monthly hit to real pay growth since financial crisis

15 Mar 2017, by Geoff Tily in Economics

Pay growth down and inflation up means the lowest real pay growth for more than two years, and the sharpest decline on the month since the global recession in 2009.

Average earnings growth slowed to 2.3% in January 2017 from 2.6 % in December

Inflation rose to 1.8% in January from 1.6% in December

Real pay growth fell to 0.8% from 1.4 %.

Real pay growth was last lower in 0ctober 2014 when it was 0.4% (green line on chart below).

The reduction in real pay growth rate of -0.6 percentage points on the month was the largest since December 2009, when real pay growth also slowed by -0.6 ppts on the month (green column).

Moreover normal service on nominal pay growth (the red line) appears to have been resumed, where forward steps too quickly become backward steps.

Real earnings annual growth, per cent

Source: ONS

While it is early days to call a decisive slowdown in nominal pay, it is striking that this slowdown comes across all the major industries in the private sector. The chart below shows nominal pay growth slowing in each of manufacturing, services and construction sectors.

Compared with recent peaks,

services is down -0.3 ppts

manufacturing is down -0.9 percentage points and

construction is down -4.0 ppts (albeit from a much higher figure)

Strikingly, manufacturing and construction pay growth peaked in the middle of 2016 …

Pay growth by industry, per cent

Source: ONS, AWE regular pay

We might be used to it, but shrinking nominal pay growth is not what we would expect of an economy in good health. With the Budget a major but unsurprising dis-appointment from a macroeconomic point of view, Theresa May seems content to leave Britain drifting towards a new living standards crisis.