Business

Real wages to rise for first time in six years, EY says

Pay slip Image copyright Getty Images
Image caption The 'cost of living crisis' has become a key political debate

Wages are set to rise by more than inflation for the first time in almost six years, says an economic forecaster.

EY says a "long period of low inflation" means average earnings could rise faster than the cost of living as early as this month.

It believes low inflation and a strong pound will keep an interest rate rise on hold until the end of 2015.

The auditor also thinks the UK economy will see "decent but unspectacular" growth of 2.9% this year.

Most of that growth will continue to be driven by consumer spending, according to the firm's forecasting group, the EY ITEM Club.

Low inflation

It adds that spending power will be helped by average wage increases of 1.7% this year, overtaking its 1.6% average inflation forecast for 2014.

Its latest report reads: "We expect wage growth to overtake CPI inflation as early as April."

"Until now the recovery has been financed by a fall in the amount households save, but it appears to be moving to a firmer footing," said Peter Spencer, the club's chief economic advisor.

"The consumer upturn will be given a boost from real wages and rising employment, while investment is finally kicking in."

Falling petrol, energy and food prices, driven low by a strong pound, will help keep the cost of living down for a sustained period, Mr Spencer added.

"We are set for a long period of low inflation as pressures from commodity prices... remain largely absent."

'Crucial lid'

With inflation under control and a stronger pound, the club predicts the Bank of England will keep interest rates on hold at 0.5% until the third quarter of 2015, at which point rates will rise very gradually.

The EY ITEM Club also suggests the recent resurgence in the UK housing market will be dampened by tighter mortgage lending criteria, due to take effect from 26 April.

Image caption EY has warned previously of a housing 'bubble' in London

It says the new Financial Conduct Authority (FCA) rules, which impose stricter checks on whether borrowers can repay home loans, are "crucial to keeping the lid on the market", particularly in London.

As a result, the report predicts prices will rise by 7.4% this year and 7.2% next year, slowing further to 4.2% in 2016 as the government's Help to Buy mortgage guarantee scheme ends.

"The FCA will assume crucial importance to ensure... affordability is scrupulously checked," said Mr Spencer.

"If these controls are rigorously applied this will eventually constrain London prices, and head off problems when interest rates rise."

Meanwhile, the growing demand for labour should push up wages and could also see the UK overtake Germany as the country with the highest employment in the G7 group of leading economies, the group claims.

It predicts the UK unemployment rate, currently at 7.2%, will fall to 6.5% by the end of the year and 6% by the end of 2015.

The EY ITEM Club, also expects business investment to grow by 9.1% this year in another boost to productivity and wages.

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