UK wages poised to pass recovery milestone

LONDON Mon Apr 14, 2014 2:03am EDT

A sign for Bank Street and high rise offices are pictured in the financial district Canary Wharf in London in this October 21, 2010 file photo. REUTERS/Luke Macgregor/Files

A sign for Bank Street and high rise offices are pictured in the financial district Canary Wharf in London in this October 21, 2010 file photo.

Credit: Reuters/Luke Macgregor/Files

LONDON (Reuters) - Britain's recovery from its deepest recession in decades looks set to pass a milestone this week when a six-year run of declining living standards is expected to show a turnaround.

An end to the erosion of earnings by inflation will be a welcome change for Prime Minister David Cameron as the May 2015 national election approaches, even if it will take several more years to repair the damage caused by the financial crisis.

Figures due on Wednesday are expected to show that average weekly earnings, the most widely watched measure of pay, picked up speed to rise by 1.8 percent in three months to the end of February, according to a Reuters poll of economists.

That would edge earnings above the 1.7 percent rise in the consumer price index in February. Data on Tuesday is likely to show the CPI fell further to 1.6 percent in March.

Analysts say the trend looks to be reverting back in favor of earners after Britain's economy picked up speed over the last year and unemployment fell fast. Higher income would help ease concerns about a reliance on debt to fuel consumption.

Prices have been rising faster than pay almost continually since the start of the financial crisis in 2008, with the exception of a few months that were affected by one-off factors.

<For a graphic, click on link.reuters.com/nag44s>

So this week's numbers are likely to give Britain's finance minister George Osborne a chance to build on his increasingly upbeat tone about the economy, even as he sticks to his other core message of more painful spending cuts in the years ahead.

The opposition Labour party has made the "cost of living crisis" a key message ahead of the elections.

Wage earners are unlikely to feel much of an immediate improvement in their living standards.

Earnings growth below 2 percent remains weak by historical standards. Before the financial crisis the Bank of England was relaxed about wage rises of 4-5 percent.

And pay is only on the verge of overtaking inflation because of a sharp fall in price growth, something that could change if productivity gains remain weak and inflation picks up again.

Many workers in Britain are already seeing their pay grow more quickly than consumer prices. Incomes Data Services, a unit of Thomson Reuters, found wage settlements rose by a median 2.5 percent in the first three months of this year among the 1,000 medium-sized and large companies that it tracks.

Wages for lower-paid workers are likely to get a boost later this year when the national minimum wage rises by 3 percent.

SLOW PROGRESS

Britain's economic recovery has been much stronger than expected. Last year the IMF was urging Osborne, unsuccessfully, to do a policy U-turn and speed up public spending to stave off the risk of a new recession. Now, it expects the country to have the fastest growth in the Group of Seven economies in 2014, at 2.9 percent.

Even so, Britain's gross domestic product still has not recovered its pre-crisis size - something that is only likely to happen in the next few months, a far slower recovery than experienced by the United States or Germany for example.

And high levels of immigration and weak productivity in recent years mean that GDP per capita is only likely to get back to its pre-crisis peak levels in 2017, according to Britain's independent budget forecasters.

Incomes, adjusted for inflation, could take even longer to cast off the impact of the recession as the government tightens its grip on welfare spending.

With many voters unlikely to feel a significant improvement in their personal finances before the elections, Cameron and Osborne may yet struggle to turn their stewardship of a recovering economy into a trump card next year, said Andrew Hawkins, chairman of polling firm ComRes.

The Conservatives have higher poll ratings than Labour for economic competence but have historically struggled to convince voters that they are on the side of ordinary people.

"The great challenge is that Cameron and Osborne may be seen as being better than Labour on the economy but people might not feel that the economic recovery is going to benefit them," Hawkins said.

(Editing by Susan Fenton)

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