LONDON (Reuters) — Britain's economy is heading into its seventh year of growth after the financial crisis but for many employers such as Mike Naylor, who runs a small metal-casting firm, business is too uncertain to raise staff pay by much this year.
With the Bank of England holding off on raising record-low interest rates until it sees stronger pay growth, Naylor said he would probably only be able to offer an increase that is less generous than last year's.
"If the confidence isn't there, it's very difficult to say we will give you two per cent or three per cent this year," he said.
Business has slowed recently at Naylor's firm, Durham Foundry, in line with much of British manufacturing, and he worries about the coming year.
"I can't see what 2016 is going to do for us," Naylor said, adding he wished he could do more for the 15-strong team at Durham Foundry, which is based in the northern English city of Sheffield - a centre for metal-working since the 14th century.
BoE Governor Mark Carney has sounded equally wary and few economists expect the central bank to move closer to a rate rise this week when it holds its first policy meeting of 2016.
After suggesting the BoE might increase rates on a couple of occasions in the past two years, only to be knocked off course by plunging inflation, Carney and his fellow policymakers are looking at pay, among other factors, to help them decide when to move on borrowing costs.
But rather than speeding up as the BoE has predicted, earnings growth has slowed down, even as unemployment has fallen back to its levels before the financial crisis. Inflation has been stuck around zero, easing the strain of low pay growth for households, but looks set to start edging up soon.
Trade union officials say stronger wage growth is needed urgently to make up for several years of below-inflation rises. "It will take until 2018 for average earnings just to get back to the real value they held in 2008 — 10 years of pay going backwards," Trades Union Congress chief Frances O'Grady said.
The breakdown in the usual economic relationship between employment, wages and inflation has stumped the BoE as well as other central banks witnessing a similar phenomenon.
Carney said in November he would look for annual earnings growth of more than three per cent, compared with a little more than two per cent now, to help him feel that Britain was finally ready for a rate rise.
Since then, oil prices have tumbled again and a new slump in China's stock markets has revived concern about the growth outlook there, prompting Chancellor George Osborne to say the British economy faced a "dangerous cocktail" of threats.
On top of the risks from abroad, investors have also become nervous about a planned referendum on whether Britain should remain in the European Union. Markets are now betting on no increase in BoE rates until 2017, which would be eight years after they were cut to 0.5 per cent.
Trying to read the economy
Jenny Holloway, who runs a not-for-profit clothes factory employing 85 people in London, shares the wariness of many employers. She held off on pay rises for her staff in January, when their wages usually go up.
The firm, Fashion Enter, is facing demands for ever cheaper clothing from high-street stores who themselves are resorting to almost permanent discounts to win over careful shoppers.
Around a third of her lowest-paid staff will benefit from a 7.5 per cent rise from Britain's new minimum wage starting in April. But the outlook for the rest of her team is unclear.
"At the moment I am just waiting. It's not very fair to staff, but I have got to read the economy," Holloway said.
Things are brighter in some pockets of the labour market. Firms desperate for skilled workers in areas such as cyber-crime prevention and digital marketing are offering double-digit pay increases to poach staff, according to Benjamin Frost, a consultant with Hay Group, a human resources firm.
Long-standing shortages of engineers and other science-based professionals have pushed up their pay. Wages for construction workers are also rising more quickly as building picks up.
The new minimum wage will directly boost the earnings of Britain's nearly 2 million lowest-paid workers in April. About the same number who earn a bit more are likely to get a rise too, albeit a much smaller one, as its effects ripple up the pay scale, according to the Resolution Foundation, a think tank.
But the impact for Britain's 31 million workers as a whole is likely to be small. The Bank of England expects the new minimum wage to add just 0.1 percentage points a year to earnings growth in the next few years.
At the same time, the BoE's forecast that wages would be rising by 3.75 per cent a year by the end of 2016 looks too optimistic to many experts. This prediction, made in November, already depends a lot on an improvement in stubbornly weak productivity growth.
BoE officials accept unemployment might fall further without pushing up wages. Deputy Governor Minouche Shafik, whose views are close to Carney's, has said she expects wages to resume their recovery soon but acknowledged this could take longer.
Carney is likely to want to give a new message on the BoE's outlook, as his previous guidance that a decision on rates would become clearer around the turn of the year has timed out. Pay growth may be part of that.
The Chartered Institute of Personnel and Development, a trade group for human resources firms, expects pay rises to remain stuck around two per cent this year.
Unlike in previous economic recoveries, British employers can hire workers from across 27 other EU countries, easing the pressure usually felt when skilled workers become hard to find locally, the CIPD's chief economist Mark Beatson said.
Tougher welfare rules that have pushed more Britons into work and a steady rise in the number of people delaying retirement have also kept the heat off wages.
"I think it's old-fashioned to think that we hit skill shortages and then prices start going up," Beatson said.
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