British Workers Face Another Year of Belt-Tightening in 2018

(Bloomberg) -- U.K. workers are due for another year of wage pain as Brexit uncertainty and faster inflation deliver a real-terms pay cut, according to a new report.

Britons will see their real wages drop 0.5 percent next year, lagging behind a global average of a 1.5 percent gain, according to a salary forecast from Los Angeles-based recruitment firm Korn Ferry, based on their database of 20 million job holders.

That’s bad news for employees who have already seen their incomes squeezed this year by meager pay increases and higher prices in the wake of the Brexit vote. Consumer-price inflation is currently at 3 percent, the highest rate since 2012, while average wage growth hasn’t topped 2.5 percent since the end of last year.

“Pay increases are just not keeping pace with inflation,” said Benjamin Frost, Korn Ferry’s global general manager for pay. “2018 is set to be a tough year for U.K. business.”

A report Tuesday is forecast to show the speed of U.K. price gains was unchanged last month, though economists expect it to slowly reduce to 2.3 percent by the end of next year, according to a survey by Bloomberg. Analysts also cut their forecast for economic growth in 2019 to 1.5 percent.

No Deal

The outlook could deteriorate further, depending on the outcome of Brexit negotiations. Leaving the European Union with no deal in place could cut growth by almost 5 percent over the following decade, according to the Santa Monica, California-based Research and Development Corporation. The EU, by contrast, would lose 0.7 percent in growth over the same period if it fails to agree to a new trading relationship with Britain.

That’s the worst-case outcome of the current negotiations, the think tank said in a report. It analyzed eight different possible outcomes of the Brexit talks, and found that striking a trade deal with both the U.S. and EU would be the best outcome for the British economy.

However, most possibilities -- including a U.K.-EU free trade agreement, a customs union covering goods and something akin to the Swiss model -- would result in a hit to growth.

“The U.K. will be economically worse-off outside of the EU under most trade scenarios. The key question for the U.K. is how much,” said Charles Ries, international vice president at RAND. “It is in the best interests of the U.K., and to a lesser extent the EU, to achieve some sort of open trading an investment relationship post-Brexit.”

Best Outcome

Brexit Secretary David Davis said this week that the U.K.’s trade deal with the EU should include the best parts of the bloc’s agreements with Japan, Canada and South Korea, as well as financial services. He said that the chances of the U.K. leaving without a deal have “dropped dramatically” since the sides reached a breakthrough deal last week to allow talks on to the future trading relationship.

The best overall outcome would be an agreement between the U.S., the U.K. and the EU, similar to the Transatlantic Trade and Investment Partnership, which is currently in hiatus, RAND said. In that case, an EU-U.K. free trade agreement would be “supplemented” by one with the U.S. that eliminates tariffs on goods and agriculture, and reduces non-tariff barriers, according to the report.

©2017 Bloomberg L.P.