UK Pay Growth Defies Economic Stagnation

UK pay growth accelerated at the end of 2024 despite a stagnant economy, driven by private-sector wages. However, concerns loom over sustainability amidst rising costs and government tax changes. The Bank of England remains cautious on cutting interest rates, forecasting a slow in wage growth as economic weakness persists.

The latest data from the Office for National Statistics reveals that British pay growth has accelerated, rising by 6.2% in the private sector for the final quarter of 2024, excluding bonuses. This marks the fastest pace in a year and highlights inflation pressures prompting the Bank of England's cautious stance on interest rate cuts.

Sterling saw a rise following the release of the data. Suren Thiru from ICAEW remarked that the data didn't indicate economic decline, making it unlikely for the Bank of England to reduce rates in their upcoming March meeting. Despite this pay growth, economic stagnation and increased business costs suggest the trend might be temporary.

The growing wages exceed the Bank's 2% inflation target. The Bank foresees a slowdown in annual wage growth as economic sluggishness impacts the labor market. Additionally, increasing social security contributions proposed by Finance Minister Rachel Reeves may dampen hiring and wage progressions moving forward.

(With inputs from agencies.)