UPDATE – Since this article was originally published, there has been the deepest recession in history. Some industries such as travel, hospitality and events management have been hit extremely hard and therefore the predictions in this article do not apply. Other sectors such as technology have seen significant growth and therefore aren’t impacted in the same way.
After a surprisingly strong year in pay growth, the economic environment looks more uncertain as we head into 2020. Average UK salaries increased by up to 3.9% in 2019, eclipsing the predicted 3% growth rates that were suggested at the end of 2018. Why was this? The sustained job creation in 2019 surprised observers. The smart money suggested that Brexit uncertainty, the ongoing US/China trade dispute and the general slowdown of the world economy would hit UK jobs. However, this didn’t prove to be the case as the below graph from the ONS demonstrates:
Will demand by maintained?
The below graph demonstrates that the drop in unemployment has levelled off and is increasing slightly from month to month. The recent spread of Coronavirus is also starting to have an impact. GDP growth is flat and it is anticipated that there will be issues arising in the Travel and Tourism sectors in particular. If Global demand continues to decrease, there is the risk of the UK falling into recession which will, of course, depress salary increases.
So how will this affect salaries?
Supply and demand and salary increases
Typical wisdom suggests that the greater the demand for labour, the larger the salary increases offered. Often referred to as the ‘War for Talent’, certain skills become highly desirable and in a near full employment environment, this can lead to soaring salaries. So we would therefore expect the average UK pay rise in 2020 to at least mirror this years. Or would we?
Uncertain macro-economic environment
There are still a lot of uncertainties out there and they will impact the average UK pay rise in 2020.
- How dramatic will the spread of Coronavirus be and can the economy remain resilient?
- What sort of Brexit will occur and when?
- Will the US/China trade dispute continue to escalate?
When I wrote last year’s blog, I really didn’t think I’d still be talking about Brexit. Although we now have a clear direction of travel, we have no idea whether membership of the European Free Trade Area will be maintained. Brexit still has the ability to depress demand and cause EU nationals to decide their future lies outside of the UK. If that is the case, the average UK pay rise in 2020 could increase as skills become scarcer.
China and the US
The ongoing trade dispute has the ability to suppress the average UK pay rise in 2020. Why? Although the UK isn’t an export driven economy, some of our largest trading partners are. Germany is limping along just avoiding a technical recession due to falling exports to China. If they fall into recession, as the powerhouse of Europe, they could drag others with them.
We’ve probably all seen the satellite images which show the startling reduction of pollution in China. This downturn in industrial activity has affected many global companies. China’s position as the workshop of the world may now be under threat as companies review their supply chains. Can they afford to be as exposed to one country as they have been? What’s the knock on to UK salary increases? Well a drop in global demand could reduce the need for labour and therefore depress prices. Watch this space to see how quickly the world responds to, and recovers from, the Covid-19 outbreak.
So what is the average UK pay rise in 2020 likely to be?
Given all the variables we’ve talked about, the salary surveys are still consistently pointing to a 3% average UK pay rise in 2020. This will vary from sector to sector but there is sufficient evidence out there to support a healthy increase. It probably won’t be as good as last year, but it’ll be better than most of the previous 10 years. However there are many bumps in the road so confidence in the 3% increase may be weakening.