UK pay surges 6.4% but real wages drop 2.6%

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, comments:

“Britain’s unemployment rate was largely unchanged at 3.7% in the three months to November despite talk of a recession, but with vacancies falling by 75,000 to 1.16 million over the October to December period - the sixth consecutive quarterly drop - employers appear increasingly jittery about the state of the economy.

“While the economy grew by a surprise 0.1% in November, raising hopes that the dreaded recession might be avoided, the double hit of persistently high inflation and rising interest rates will take their toll on households and businesses at some point meaning a downturn is still very likely – albeit a shallower one that starts a little later than expected.

“For now, however, it seems employers remain intent on retaining workers. Pay growth stayed strong with regular pay, excluding bonuses, and total pay, including bonuses, both rising 6.4% in the three months to November – though this was deeply negative in real terms once inflation of 10.7% is factored in. This means real wages dropped 2.6% in the three months to October for real and total pay – one of the largest falls since comparable records began.

"Yet again, the purchasing power of Britain’s workers is taking a pummelling meaning incomes simply don’t stretch as far - not a huge surprise when you consider the many blows to worker pay from the soaring cost of goods and services to rising mortgage and debt repayments and the highest tax burden since the 1940s.

“With the pay squeeze intensifying and typical households likely to be £2,100 worse off by April 2024, according to the Resolution Foundation, the industrial action rapidly becoming a regular feature of post-pandemic life, as workers down tools in a bid to secure pay rises more closely aligned to the inflation rate, is likely to persist.

“For households already struggling with the cost-of-living crisis and the threat of further interest rate rises as the Bank of England continues its hiking cycle to curb inflation – there is a glimmer of hope. Oil and gas prices have eased from their highs and inflation is expected to halve by the end of the year but that won’t eradicate the risk of job loss – a nasty side effect of a slowing economy when businesses slash headcount in order to reduce costs.

"One thing protecting jobs in the short term is the continuing shortage of workers. The UK’s economic inactivity rate is still well above pre-pandemic rates at 21.5% - largely driven by those aged 50 to 64 retiring early as well as the high long-term sickness rates and lengthy NHS waiting lists. But with so many economic headwinds, job insecurity will become more of an issue as 2023 progresses and households should brace their finances for all eventualities.

“A sharp rise in credit card debt in November indicates that some are already turning to credit to fund their lifestyles as their real wages continue to slide and mortgage costs jump up. The best way to emerge from the financial squeeze unscathed is to curtail expenditure where possible and draw up a sensible budget that incorporates debt repayment and building up a sizeable emergency fund to fall back on in the short term should the worst happen, and a job is lost.

“Don’t neglect long-term savings either as a robust retirement plan is also key to financial security. Taking the foot off the pensions pedal in times of financial strife can seem like a natural solution when money is tight. But making cuts today to preserve cash for short-term needs – something younger workers with longer timeframes to make up the shortfall may be tempted to do - can jeopardise financial futures.

“Instead, remember that money directed towards pension saving comes with the gift of free cash in the form of tax relief which is applied to contributions at the taxpayer’s highest rate of income tax. Basic rate taxpayers get 20% added to their pot with each contribution, those on the higher 40% tax rate get a further 20% in tax relief, while additional rate taxpayers receive a further 25% back – making it one of the savviest inflation-beating strategies at a time when a growing number of people will become subject to higher tax bands under the planned freeze in thresholds until 2028.”