The CBI hailed the fall from 2.5 per cent in the three months to March as good news for industry's competitiveness. But labour market analysts warned that settlements may have picked up more recently.
A separate study by the Monks Partnership showed that the pay increases of top executives have also been slowing. A quarter of large industrial and commercial companies cut the total earnings of their highest- paid director last year. But the average top executive enjoyed an increase in earnings of 5.5 per cent.
The CBI also reported a slowdown in service sector pay awards, dropping from 2.8 per cent in the three months to March to 2.5 per cent in the three months to April.
Manufacturing pay awards continue to outstrip inflation, which averaged just under 1.7 per cent between February and April. But the CBI took comfort from the fact that pay increases were expected to be more than offset by 4.8 per cent growth in productivity - output per worker employed - in the coming year.
The fall in pay settlements did not convince City analysts that the annual growth rate of average earnings would fall much below its current 4 per cent.
Kevin Gardiner, of SG Warburg, said earnings growth was unlikely to drop as far as 3 per cent.
Further falls in unemployment and evidence that economic recovery is gathering strength are expected to boost settlements, as workers become less fearful for their jobs.
Signs that recovery remains on track came with figures for cash in circulation suggesting that growth in the narrow money supply measure M0 - largely notes and coins - rose back above the 4 per cent ceiling of its monitoring range last month.
The Central Statistical Office's cyclical indicators also suggested that the recovery was continuing, with the coincident indicator - which provides a contemporaneous monthly snapshot of the economy - rising for the 12th successive month.
Recent falls in unemployment have also stabilised the lagging indicator, which points to the strength of the economy 12 months ago.
View from City Road, page 30