Wage rises to outstrip inflation as strain eases

Howard Archer, chief UK & European economist at IHS Global Insight, expects unemployment to be below 7pc, a mark previously used by Mark Carney, Governor of the Bank of England, as a warning of an increase in interest rates. But new guidance from the Bank suggests it is unlikely there will be any material change in borrowing costs before next year. Mr Archer says a gradual but sustained rise in real pay should not pose a significant inflation risk for some time, while the improved purchasing power would support consumer spending, reducing the risk of a major build- up of debt to finance retail sales.

Two reports out today underline the recovery theme. The EY Item Club says the UK is set to experience a long period of low inflation growth as the economic recovery gains traction. Meanwhile, a Lloyds Bank regional survey shows Wales has experienced its strongest business expansion for over 13 years.

The EY Item Club, which uses the Treasury model for its forecasting, sees a combination of increased labour demand, a fall in commodity prices, the pick-up in wages, a low inflation rate, and a stronger pound, as all helping the economy. Peter Spencer, chief economic adviser, expects interest rates to remain on hold until after the next election, stimulating further investment.

A “simmering” housing market will be dampened by tighter lending criteria and an increase in housebuilding will control prices, preventing an unsustainable boom, the report adds. The Club wants the Financial Conduct Authority to maintain a tight control on the link between incomes and mortgages.

The report also suggests Britain is on course to overtake Germany and achieve the highest rate of employment in the G7. The German rate last year was 73.3pc for the 16-64 age group, but the UK total is expected to rise above that by 2017.

Today’s Lloyds Bank survey shows business activity across England and Wales continued to increase last month. Although the index measuring overall activity was the lowest for nine months, growth remained strong.

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