Quantcast
Menu
Save, make, understand money

Household Bills

2021 wage forecast to be below 2007 levels

Paloma Kubiak
Written By:
Paloma Kubiak
Posted:
Updated:
25/11/2016

A think tank has given a damning verdict on the UK’s economic outlook as wages in five years’ time will be below the levels seen in pre-crisis 2007.

In its response to the Autumn Statement, the International Longevity Centre UK (ILC-UK) calculated that in 2021 wages will be £11,600, or 31% below what it might have expected given trend wage growth before the recession.

Underpinning the slow wage growth is both higher expected inflation caused by the falling value of sterling as the UK prepares to leave the European Union, but also continued stagnation in nominal pay growth.

The report states: “The latter is reflective of long term sluggish productivity growth as well as continued evidence of some slack in the labour market – with underemployment still higher than it was before the financial crisis. Both of these two challenges would have remained prominent irrespective of our vote to leave the EU. But Brexit may exacerbate this situation by driving up imported inflation.”

By 2022, it estimates that economic output per person will be over 25% smaller than levels seen before the crisis and this economic weakness will impact household finances.

Further, it stated that the Bank Rate is expected to remain firmly in the “zero lower bound” while returns on long-dated government bonds are likely to remain at historically low levels so savings won’t go as far.

While households are not expected to take on as much debt as they were in previous Office for Budget Responsibility (OBR) forecasts, ILC-UK believes this doesn’t automatically translate into additional savings.

“Indeed, the household savings ratio – a critical measure of the amount saved as a proportion of disposable income – has been falling and is expected to remain low up to 2022. This is despite the continued roll out of automatic enrolment,” it stated.

The ILC-UK said that while savers have been dealt bad economic news, it doesn’t mean the government should shy away from its objective of supporting private savings through auto-enrolment.

“In 2017, the government will have some big decisions to make about the future of long term savings, particularly with regard to the review of auto-enrolment which has been a real success in terms of driving up the number of people saving but not the amount being saved.

“Many have advocated autoescalation, whereby pension contributions automatically increase at regular intervals to boost savings levels. But against the economic picture painted by the OBR, of falling consumption growth, and stagnating real wages, the temptation for government to shy away from autoescalation may rise.”

As the chancellor outlined in his speech said that the successive parliaments will need to ensure they tackle the challenges of rising longevity and fiscal sustainability, ILC-UK suggested that private savings will need to play a large role in supporting future pension incomes and can “invest in a way to drive forward the productivity of the UK economy”.