UK wage stagnation means nation lags behind global growth upturn

Global trends highlight that while there has been continued improvement in employment figures, real-wage growth has stagnated since the financial crisis. Improved consumer confidence on the back of improving real-wage growth as skill demands tighten, may be missed in the UK, where growth figures remain in the doldrums.

The world economy has seen its fortunes rise, with global economic growth of 3.6% – boosted by Chinese growth and a Eurozone pickup. Projections are for another strong year going into 2018, with estimates putting growth at 2.5%, boosted by growth improvements across the board.

To better understand the current trends in global economic performance, Mercer released its ‘Economic and Market Outlook 2018 and Beyond’ study. The study combines a range of key economic indicators with its analysis to identify likely scenarios in 2018, as well as risks to various asset classes’ value, such as rates rises and geopolitical uncertainties.

The global economy’s return to pre-financial crises levels of growth, has also seen the level of unemployment across developed economies hit lows not seen since the 1980s. Unemployment fell steadily between 2013 and 2017, with more and more people being engaged in some form of employment.

However, while unemployment is down, concerns around the kind of employment remain. in the US, for instance, many are underemployed, resulting in a considerable skill mismatch. Working poverty is also up, with many people barely living pay-check to pay-check. Concerns around pay have increased in recent years too, with many in the UK finding themselves paid relatively less than prior to the crisis. Companies, meanwhile, have boosted their profit margins to new heights, resulting in, among others, increased inequality and social disintegration.

The trend of relatively stagnant wage growth, of around 3% annually, and decreasing unemployment figures, is to come to an end according to the firm, as companies increasingly find themselves competing for skills.

Europe is projected to continue its growth spurt into 2018, with unemployment falling further (it fell by 1% on last year) to 8% - the lowest level since 2000 and in line with full employment across the region. Wages too, are projected to increase, while inflation in the region will remain steadily below 2%. 

Consumer crunch

The UK, however, continues to suffer from relatively high levels of inflation, at more than 3% in the most recent quarter, while wage growth continues to lag. Increased wage pressure in the current environment is unlikely to see wages return to pre-crisis levels (accounting for inflation) before 2025, thereby hampering consumer spending power in the nation, in spite of returning confidence. As a result, leading economists have recently forecast that the UK will only see growth of 1.5% in 2018.

Globally, consumers are increasingly optimistic, following a protracted period after the financial crisis during which individuals, and businesses, were in the dumps. Consumers’ confidence breached positive territory in 2014, which it has then sustained – the most recent year and the projection for next year is continued confidence growth.

Businesses, however, have seen up and down swings in confidence since the crisis, entering positive territory in 2014, before falling into negative territory throughout 2016 and into 2017. The analysis suggests that 2018 will be a relatively good year for business, with confidence rising sharply in the most recent period of analysis.