Bank of England's Carney predicts UK living standards boost

February 21, 2018 - 11:08 am

LONDON (AP) — Bank of England Governor Mark Carney expressed hope Wednesday that British households' living standards will finally start to rise following a period when price rises have outstripped wage increases.

Addressing lawmakers on the Treasury Select Committee, Carney predicted a "return to real income growth" this year — that is, average wages will rise by more than inflation. That should give a boost to economic activity, particularly consumer spending, at a time when the economy is facing a welter of uncertainty linked to the country's looming exit from the European Union.

Inflation in Britain has risen sharply since the Brexit vote in June 2016, which triggered a sharp fall in the value of the pound and raised the cost of imported goods, notably energy and food. From below 1 percent, annual inflation is running at 3 percent, an increase that has already prompted the Bank of England to raise interest rates for the first time in a decade.

Carney sought to clarify the scale of the hit to household incomes since the referendum. When accounting for price changes, wages have been 3.5 percent lower than the bank had been predicting before referendum. That gap, which is in effect like a tax hike, should widen to 5 percent this year before real income start growing again, he said.

Wage growth has been stubbornly low even though unemployment has fallen to its lowest rate since the mid-1970s. That is partly linked to uncertainty lingering from the global financial crisis a decade ago.

"Fewer people have been moving between jobs during the course of this recovery than would be typical of a normal recovery and that's held back to some degree the pace of the pay pick-up," Andy Haldane, the Bank of England's chief economist, told lawmakers.

But there are signs that wages are beginning to rise. Official figures released Wednesday showed average weekly earnings in the three months to December excluding bonuses were up 2.5 percent on the previous year. That's up from the previous month's 2.3 percent rate.

"We do think that the long-awaited pick up in wages is starting to take root," said Haldane, who added he expected average earnings to "nudge up to have a 3 in front of it in the first quarter."

Should wage growth continue to rise as expected, it will soon outstrip price increases. Inflation is expected to ease over coming months after the Bank of England hiked its main rate by a quarter-point last November and as previous price rises linked to the fall in the pound drop out of the annual comparison.

Carney and other rate-setters from the Monetary Policy Committee also kept the door ajar to another rate hike this year but stressed that much depends on developments beyond their control, including the Brexit discussions which have entered a crucial stage focusing on future trading relations.

Britain is due to leave the EU in March 2019 but there is uncertainty over how it will do so. Carney has laid out his hope that a transition deal will be agreed soon whereby Britain remains in the tariff-free European single market and customs union. Business lobby groups are urging clarity so they can plan ahead.

Brexit uncertainty remains the biggest cloud over the economy — businesses, Carney said, invested around 3 percent less than they otherwise would have done last year.

"The effect of the uncertainty around future trading relationships is having an impact on the demand side of the economy," Carney said. "I don't think that's controversial, it's pretty clear."

From being one of the fastest-growing economies in the Group of Seven leading industrial nations, Britain is now one of the slowest, albeit growing by more than many had predicted before the Brexit referendum.

"We have moved from the top of the pack to the bottom," Carney said.

This month, the Bank of England surprised many in the markets by indicating that it could make another quarter point rate hike, to 0.75 percent, in May.

One development that may complicate matters for rate-setters is the news that unemployment in Britain rose in the three months to December, for the first time since the aftermath of the Brexit vote, albeit by a modest 0.1 percentage point to a still historically low 4.4 percent.

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