What are the reasons for the UK wage breakdown?
How has the UK’s decline in real household incomes affected the economy?
What is the reason for the increased labour demand in the UK?
What does the Bank of England forecast for the UK inflation rate in the coming months?
The UK is on the verge of a recession for households as rising prices have weakened consumer confidence and forced people to cut spending. UK wage breakdown has come at a time when inflation is at an all-time high.
Decrease in real household income
Confederation of British Industry (CBI) made the remarks in an economic forecast report on Monday. The Confederation is a leading business group representing 190,000 companies and businesses in the UK. Analysts at the Confederation of British Industry estimate that due to high inflation, real household incomes will fall by 2.3% by the end of the year, the most significant annual decline since the record began in the mid-1950s. UK wage breakdown will make it difficult for British households to meet ends.
Weakening British GDP growth
High inflation is the primary source of weaker growth, with the record-high cost of living resulting in a “historic squeeze” in household incomes, which will lower consumer spending, CBI warned. “We may avoid technical recession mainly thanks to business investment at the moment being high due to the super-deduction,” CBI director-general Tony Danker told journalists. The group added that the reduction in household budgets, in turn, will weaken GDP growth at the end of this year and in the first half of next year. The group also cut its forecast for UK economic growth this year from its previous estimate of 5.1% to 3.7%. This estimate for 2023 also dropped from 3% to 1%. According to the report, declining wages in the UK and high inflation will be the main reasons for weak economic growth.
UK wage breakdown due to prices
The Office for National Statistics said that the average income in terms of prices, excluding bonuses, decreased by 1.9% compared to the previous year, which was the most significant decrease in wages since 2013. According to Bloomberg, rising prices are taking away the benefits of the most vital labour market from workers. Wages excluding bonuses rose 4.2 per cent in the first quarter, more than double the average of 2.1 percent in the pre-epidemic decade. This increase could not offset the increase in the cost of living. As inflation rises above 10 percent by the end of the year and the government raises taxes, consumers are facing an almost unprecedented drop in their disposable income, and the UK wage breakdown will put double pressure on the UK.
Increasing demand for labour
Some analysts say this could plunge the economy into recession, raising the question of how much the Bank of England (BoE) is raising interest rates. The labour market fell to 3.7 percent in the first quarter, the lowest rate since 1974, and rising vacancies to record levels. Employers are trying to find workers because hundreds of thousands of people who left the labour force during the Covid-19 epidemic have returned.
Employers added 121,000 people to their payroll last month, more than double the forecast. For the first time, the number of vacancies was higher than those registered as unemployed. The BoE expects the number of unemployed to increase by the end of the year as employers respond to a sharp drop in demand. Policymakers are raising interest rates to bring inflation back to the 2% target. The concern is that if workers believe inflation remains high, demand for wages could rise across the economy.
11% inflation forecast in the UK
The Bank of England expects inflation to rise slightly above 11 per cent in October, with increasing food and fuel prices plunging millions of Britons into wage cuts in the UK and the worst cost of living crisis in decades. Annual consumer price inflation rose to 9 percent in April, the highest since 1992. The Bank of England expects inflation to rise slightly above 11% in October. The Food research firm IDF reported that food prices could increase by 15% in the summer. The report says a ban on exports of essential goods, including palm oil from Indonesia and the war in Ukraine, which has limited exports from the region, are among the factors that have boosted food inflation.
The plight of the British economy
According to the ONS, GDP fell 0.3 percent in April, following a 0.1 percent decline in March. Production in all three major sectors – services, manufacturing and construction – fell for the first time since January last year. The Bank of England decision came a day after the US Federal Reserve raised rates by 75 basis points to control inflation. This is the most significant increase in the Federal Reserve since 1994.
George Buckley, chief economist for UK and Europe at Nomura, said it was “understandable” that the Bank of England had decided to raise interest rates relative to its US counterpart. “The Bank of England [thinks] that high current inflation will, by itself, hit growth and ultimately bring inflation down in the future,” Buckley said. “The bank is grappling with surging inflation, but at the same time the risk of recession — so it’s understandable the differences of opinion on the Committee right now about the scale of tightening required,” he added.
Final Remark
The CPI consumer price inflation index reached its highest level in 40 years (9%) in April due to several problems, including supply chain disruption, rising commodity prices and the war in Ukraine. The group forecasts that inflation will remain high until the fall of this year, reaching another peak in October (8.7%), when Ofgem (Office of Gas and Electricity Markets) is expected to raise the energy price ceiling. Given the UK wage breakdown, this will put more pressure on households.
