Slow wage growth hits spending

It will be younger generations and the ‘squeezed middle’ who will suffer the most, EY ITEM Club said, while older workers will be better protected.

The non-governmental forecasting group’s survey points to a slowdown in consumer spending growth over the next two years as annual wage growth up to 2017 is likely to remain well below the 4.5 per cent to five per cent rises typical before the financial crisis.

The pace of consumer spending growth is only expected to increase by just over two per cent next year and in 2016, which is a significant reduction on the average annual growth rate of 3.7 per cent seen in the pre-crisis decade.

The ITEM Club believes that the record numbers in work, currently at 30.6 million, will continue to grow and act as a check on wage rises.

The median real take home pay of £18,852 in 2008 is forecast to fall to £17,827 in 2017, according to the survey. And the median wage for the top 10 per cent of workers of £37,735 in 2008 will slip to £35,632 in three years.

Martin Beck, senior economic adviser to the EY ITEM Club, said: “Total household incomes have strengthened because more people are in work but individuals do not have extra money in their pockets.

“Real wages are being held back by strong growth in the supply of workers and the fact that firms are facing increased non-wage costs, such as new pension schemes.

“We expect this trend to continue for several years to come and it will be mirrored with a slowdown in consumer spending growth.”

According to the report, competition for highly skilled workers means this group will enjoy the highest returns, while those in low pay will be supported by higher minimum wage levels and tax allowances.

But it adds the “squeezed middle” look set to stay in that position for some time, as their spending power will rise more slowly than workers in high or low pay.

Mr Beck added: “The ‘squeezed middle’ is also going to continue to struggle, as limited growth in disposable incomes, reflecting weak pay rises and the threat of jobs being automated, leaves them no choice but to remain frugal with their spending in the near future.”

The report adds that in these harsher times the old will do better than the young.

It says people in their 20s and 30s will continue to be hit by above average unemployment rates and the need to save for larger house deposits in a rising market.

But for older people the triple lock guarantee on state pensions and the growing numbers of workers over 65 will benefit.

Mr Beck said: “Over the next few years our expectation is that the winners in the income wars will be older households while the young will continue to face significant obstacles to a decent rise in disposable incomes.”

The number of people over 65 in work has surged to 1.1 million, up 60 per cent from 2008.

For adults in lower paid jobs, a scheduled rise in the minimum wage kicks in this week. From October 1, the National Minimum Wage will rise by 19 pence (three per cent) an hour, to £6.50. The Government said this will see more than one million people’s pay rise by up to £355 a year.

Two per cent rises in the minimum wage paid to 16 to 20-year-olds, and for apprentices, are also being introduced.