UK wage growth will probably slow later this year and consumers may have to cut back on spending, Mark Carney said on Wednesday.
Speaking before MPs, the governor of the Bank of England reiterated the central bank’s May forecast that pay growth will soon come off its recent highs, boding ill for an economy heavily driven by consumer spending.
Mr Carney said consumption by households has been fuelled by rising incomes rather than greater debt. According to the latest official data, average earnings are now 3.4 per cent higher than a year ago, well below inflation.
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“The issue on the horizon is whether the pattern of employment growth and real wage growth is itself sustainable and, of course, that will be influenced by the Brexit negotiations, the end-state and the transition to that end-state, so it’s possible that there will need to be an adjustment to household spending,” Mr Carney told the Treasury Select Committee.
BoE deputy governor Jon Cunliffe, speaking alongside Mr Carney, echoed those predictions. He said spending might also fall as a result of consumers choosing to rebuild their savings, having drawn on them in the months after the Brexit vote when a sharp depreciation of sterling and resulting inflation delivered “a shock” to real household income growth.
Mr Carney also pointed to a longer-term trend in support of his forecast: “Pay is related to productivity ultimately, and productivity growth has been relatively modest unfortunately for some time.”
Britain’s stubbornly weak productivity is under pressure from sluggish business investment, hit by uncertainty over Brexit, Mr Carney said, noting that “businesses have been hiring, not investing”.
Quizzed by Brexit-supporting MP Charlie Elphicke, Mr Carney admitted that “rolling short-term uncertainty” is particularly damaging for business confidence and activity. But he subtly warned against trying to clear the outlook by hurtling towards Brexit on 31 October, come what may.
“Crystallising the thing that businesses are most worried about on balance – which would be a loss of trading relationships with the absence of transition – is the worst way to resolve that uncertainty.”
Boris Johnson and Jeremy Hunt, the two contenders to replace Theresa May as prime minister, have both said they are prepared to leave the European Union without a deal.
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