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A squeeze is on the horizon.

Pay growth in the UK economy has softened to its weakest pace in seven months, raising the prospect of a slowdown on the consumer-driven growth that has been powering the British economy since the Brexit vote.

Figures from the Office for National Statistics how the rate of average rate of earnings growth slipped below the annual inflation rate for the first time in two years.

While inflation hit 2.3 per cent in February, pay excluding bonuses rose just 2.2 per cent, said the ONS.

Here’s what UK economists make of the numbers.

James Smith at ING notes that despite still healthy employment growth, the February figures offer no “good news for consumers” as inflation will likely climb above 3 per cent later this year.

Having been fairly resilient in the latter half of 2016, firms appear to be moderating pay increases as rising input prices and economic uncertainty put pressure on overall costs. The latest Bank of England Agents survey suggests that wage growth is likely to stabilise around 2.2% during 2017.

For that reason, we expect the Bank of England to continue to “look through” rising inflation and focus instead on the uncertain growth outlook. We don’t anticipate any change in Bank rate before 2019.

Elizabeth Martins at HSCB highlights that despite the unemployment rate falling to the Bank of England’s “natural rate” of 4.5 per cent “there seems little sign of that translating into better pay growth”.

In a now familiar refrain, today’s labour market figures show a strong employment picture in conjunction with weak pay growth. The number of vacancies, as well continued signs of employment growth in the PMI surveys, point to the former continuing in the near term.

The BoE has specified that it would need to see pay growth picking up in order to move from a neutral to hawkish monetary policy stance. There is nothing in this data release, from our perspective, to trigger that condition

Despite the subdued earnings growth, Paul Hollingsworth at Capital Economics thinks the UK will not experience a consumer slowdown of the magnitude seen during the financial crisis this year.

He expects that the steadily falling unemployment rate – which is at a 12-year low – should push up wages:

Consumer spending should be supported by strong confidence, decent jobs growth and supportive credit conditions. As a result, we continue to expect spending growth to slow, rather than collapse.

Analysts at Fathom have a more gloomy take. They forecast that growth in the first quarter of the year has slipped from 0.7 per cent to 0.4 per cent, with overall 2017 expansion at just 1.1 per cent (the Bank of England thinks it will be 2 per cent):

As Brexit negotiations get underway and the UK’s economic growth is weaker than widely anticipated, we expect sterling to weaken further. Indeed, under our central scenario, we see it depreciating to 1.16 against the US dollar this year, falling toward 1.08 through 2018.

Maike Currie, investment director at Fidelity stresses a “cocktail of concerns” revealed by recent economic data – including falling non-food retail sales and disappearing wage growth.

Data released this week show a cocktail of concerns for the British consumer: from a dramatic fall in non-food high street sales to a second month of the highest inflation in three years and disappearing wage growth.

“Households are starting to feel the squeeze of rising prices and stagnant earnings just as the Brexit talks kick off”, said Ms Currie.

Copyright The Financial Times Limited 2017. All rights reserved.
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