Pay deals stay high as growth tails off

PAY AWARDS are showing few signs of slowing down in spite of growing signs that higher interest rates and the strong pound are putting the brakes on economic growth.

Two comprehensive surveys of recent pay deals, due out today, show that average pay awards are still in the 3-4.5 per cent bracket. The data is likely to raise fears that the Bank of England's Monetary Policy Committee may be tempted to raise interest rates when it meets next.

Both studies - by the Confederation of British Industry and Incomes Data Services, the consultancy - point to a powerful two-way pull on pay settlements. While slowing economic growth is prompting employers to temper their awards, they are also under pressure to make sure earnings keep up with rising living costs.

Further evidence of slowing economic growth is likely to emerge this week with figures from Trade Indemnity, the credit insurance group, showing that in the three months to June more orders were cancelled than new ones placed.

The CBI study shows that in the three months to July, manufacturing pay settlements edged up slightly to an average of 3.7 per cent, compared to 3.6 per cent in the three months to April and 3.1 per cent in the same period last year. This rise is in spite of repeated complaints from manufacturers that the strength of sterling, brought on by higher interest rates, is causing a recession.

Pay deals in the services industry are also on the rise. The CBI found the average pay award rising to 4.5 per cent in the period to July, up from 4.1 per cent in April. Companies said cost of living increases and the need to keep staff were behind the rise.

Meanwhile, IDS found that pay awards were clustered in the 3-4.5 per cent range in the Spring and Summer. A typical example was Boots the Chemists, where staff received an average 3.75 per cent pay rise. However, it concludes that the conflicting pressures of rising inflation and slowing growth are affecting pay rates.

The figures will raise fears that the economy is slipping into a period of "stagflation" which combines rising inflation with slowing growth. They may provide further ammunition for the Bank to keep interest rates high. When the MPC raised rates in June, it argued that earnings growth was incompatible with its long-term inflation target of 2.5 per cent.

At the time, the Bank suggested that earnings growth would have to fall below 4.5 per cent in order to be sustainable. The most recent official figures showed headline earnings growth falling to 5 per cent in May from 5.4 per cent in the previous month.

The CBI says 43 per cent of the respondents cited an inability to raise prices as providing a drag on pay settlements. However, 41 per cent said the rising cost of living was keeping pay deals high.

The figures come at the beginning of a key week for UK economic statistics. On Tuesday, the Retail Prices Index figures for July are released. Those statistics are followed by retail sales data for July on Wednesday and second quarter Gross Domestic Product figures on Thursday.