Graphic Content – December; UK wage growth is about to surge
5th December 2017
As in many countries, wage growth in the UK has been missing in action, even as the unemployment rate has fallen to a 42-year low. Any sign of sustained wage growth therefore has the potential to cause a violent market reaction.
We can be highly confident that UK wage growth will climb in the year to end December, with December’s wage data being released in mid-February.
However, what markets will probably fail to realise is that the jump in UK wage growth will (likely) be entirely due to base effects.
We have built on some good work from Alan Clarke, UK economist at Scotiabank. Below we have assumed that UK wage growth (ex bonus) continues at an annualised rate of 2.2% for the remainder of 2017, but have then modelled three scenarios;
- Wage growth continues at an annualised rate of 2.2% through 2018
- Wage growth accelerates slightly to a 2.5% annualised rate in 2018 (this is the Bank of England agents’ lower estimate of the forecast range)
- Wage growth climbs to a 3.5% annualised rate next year (the Bank of England agents’ upper estimate of the forecast range).
We have also seasonally adjusted the forecast growth rate, so for example we have taken account of the tendency for monthly UK wage data to be lower in February, May, July and October, and to be higher in January and April.
The crucial point here is that whichever assumption you take, UK year-on-year wage growth is set to accelerate steadily from the current 2.2%, reaching a high in March 2018. Note that wage data is released with a six-week lag, so data for March is released mid-May.
YoY Wage Growth, 3 Month Moving Average
Source: Allianz Global Investors, UK Office of National Statistics. Actual data, up to September 2017, is the non-seasonally adjusted YoY figures calculated from the ONS wage index, and then taking a 3-month moving average. September’s print is a preliminary figure. Figures from October onward are forecasts, adjusting the YoY assumptions by the usual seasonal distortions for each month, and then taking a 3-month moving average. The forecasts above are therefore non-seasonally adjusted figures.
Markets have consistently demonstrated an inability to understand base effects, as evidenced by reactions to high or low inflation prints that are entirely due to prior commodity price or currency moves. We therefore strongly suspect that the market is unprepared for the wage price growth that we should see being released in the UK from February. If so, the market will also be surprised by the very sharp falls in the UK year on year (YoY) wage growth that we will see in data released in June and July, regardless of which scenario is used.