Squeeze on UK living standards eases as wages pick up

The squeeze on living standards in Britain since last year's Brexit vote appears to be abating, a development that should, if sustained in the months to come, shore up the economy as it gears up for its exit from the European Union.

The Office for National Statistics said Wednesday that average weekly earnings, including bonuses, increased by 2.1 percent in the three months to June against the same period the previous year. The consensus in the markets was that it would remain at May's rate of 1.9 percent.

In light of Tuesday's news that inflation held steady at 2.6 percent in July, the earnings figures suggest pay packets have slightly more purchasing power than they had before. Should inflation ease back, as many economic forecasters predict, then wage increases could start to outstrip price rises, helping to shore up consumer demand at a crucial time when the British government is negotiating how the country will leave the EU. That hope helped the pound recover earlier losses to trade around $1.2865.

"There is some cause for optimism that the squeeze on household finances could come to an end later this year, though ultimately the light at the end of the tunnel could be provided by falling inflation rather than rising wages," said Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown.

Last year's Brexit vote had an almost immediate impact on living standards. The 15 percent fall in the value of the pound stoked inflation by making imports like food and energy more expensive. Before the vote, wage increases were outstripping inflation, which was barely above zero.

The impact of the pound's drop has taken a while to make itself felt in the British economy, potentially because consumers spent early in anticipation of higher prices to come. But prices did rise, retail sales, which are a crucial part of the British economy, weakened. As a result, economic growth has fallen from a quarterly rate of 0.7 percent in the fourth quarter of 2016 to 0.2 percent and 0.3 percent in the subsequent three-month periods.

Another potential positive for the British economy is that unemployment has fallen to its lowest since 1975, to 4.4 percent in the three months to June from the 4.5 percent registered in May.

The employment rate — that is, the proportion of people aged from 16 to 64 who were in work — was 75.1 percent, the highest since comparable records began in 1971.

With Britain's Brexit deadline looming there have been fears that unemployment may start to rise, especially if firms put off hiring decisions until they get more clarity on what the country's future trading relationship with the EU looks like. Though it takes a while for economic changes to be reflected in the labor market, Wednesday's figures will likely help ease some of those concerns.

Lee Biggins, founder and managing director of independent jobs website CV-Library, said it's "extremely positive" that employment rates continue to rise even in the midst of the Brexit uncertainty. In fact, he said his firm has found that organizations in key industries are continuing to invest in their workforce, including manufacturing, charity, automotive and social care.

"This is particularly good given that some of these sectors were predicted to be hit hardest by Brexit," he said.