UK wages disappearing act as unemployment stays low

There was more bad news for the UK consumer on Wednesday after regular wage growth, excluding bonuses, fell to 1.7%, its lowest level since late 2014. Real wages are falling at a sharp clip, adjusted for inflation they are now at negative 1.2%, the lowest level since mid-2014.

Service sector, not a big payer…

Falling real wage growth is not a new theme, but the fact that inflation-adjusted wage growth has continued to fall to its lowest level for 3-years, is likely to keep a lid on the GBP and firmly keep the BOE on hold for some time.  It is worth noting, that back in 2011 real wage growth fell to -3.65%, somewhat lower than where we are today, but that decline came on the back of the financial crisis and a major recession for the UK economy. There is no recession today, yet wages remain stubbornly low.

Today’s data is likely to spark more debates about productivity, however, one thing is clear: when you have a gig economy that is reliant on the service sector, wages don’t appear to rise.

The impact on the FTSE 100

The UK stock index is higher on Wednesday, although it is one of the weakest performers in the European sphere. The weakest performers include Lloyds Banking Group, Sky and Vodafone, which are all impacted by either low interest rates (Lloyds), or from weak wage growth impacting consumer spending. Interestingly, Next and M&S, both highly correlated with UK consumption, do not seem impacted by the latest wage data and have pushed higher today. We doubt that this is sustainable, especially since John Lewis, the middle England department store, noted a third straight weekly fall in food sales, suggesting that even well-heeled consumers are feeling the pinch. Although the outlook for sales’ at UK consumer staples’ remains bleak, the fact that Next and M&S have some of the lowest P/E ratios in the FTSE 100 could help stoke demand for these stocks at this mature stage of the FTSE 100 rally.

GBP and UK bond analysis

10-year UK bond yields have fallen below 1% on the back of this news; the low post last week’s election outcome was 0.96%. A quick yield analysis shows that UK-US yields (white) have remained relatively stable, as US yields have also been falling on the back of tonight’s expected “dovish” rate hike from the Federal Reserve. The UK-German 10-year yield spread (orange) has also turned lower, while UK-Japan yield spread (yellow) has the most entrenched downtrend, suggesting that GBP/JPY could be most at risk from weakness in the aftermath of this data, while downside in GBP/USD could be protected.

Figure 1: