Pay downturn boosts scope for rate cut

Economy: Chancellor given fresh room for manoeuvre as CBI figures show wage inflation not affecting manufacturing sector

The Chancellor, Kenneth Clarke, was today presented with more ammunition to justify a further cut in interest rates in the shape of figures showing that pay awards in industry are turning down.

According to the Confederation of British Industry's latest pay databank, average settlements in manufacturing fell to 3.2 per cent in the three months ending in July, compared with 3.5 per cent in the three months to April.

The marked downturn suggests there is little in the way of inflationary wage pressures building up in the economy, increasing the Chancellor's scope to shave another quarter point from base rates should he choose to do so.

The CBI's figures conflict, however, with the latest average earning figures released last week showing an unexpectedly sharp rise to 3.75 per cent in the year to June. Average earnings in manufacturing were up by 4.25 per cent.

The figures came alongside a fall of 24,100 in unemployment levels in July to 2,162,200 - the lowest for five years. The drop in the jobless total was twice as big as the City had expected.

According to the CBI, four in ten manufacturers say that inability to raise prices continues to be a major constraint on pay awards while one in four cite low cost of living increases as an important factor.

The databank also shows that pay awards in the service sector have remained virtually flat since the beginning of the year. Settlements in the three months to July averaged a provisional 3.6 per cent against 3.5 per cent in the three months to April and 3.7 per cent a year ago.

Almost half the awards in manufacturing in the year to the end of July were in the 2.5 per cent to 3.5 per cent range with less than 2 per cent of settlements above 7.5 per cent. In 6 per cent of cases firms paid no increase at all.

The survey also showed a small improvement in manufacturing industry's efficiency, with firms reaching settlements in the second quarter reporting average productivity improvements of 4.5 per cent over the previous 12 months compared with 4.3 per cent for those agreeing settlements in the first three months of the year.

Other figures due out this week on retail sales and manufacturing orders are expected to reinforce the picture of subdued economic growth. High street sales figures for July are expected to show a moderation in the rate of growth due to poorer weather and the end of Euro '96.

Meanwhile, the CBI's monthly industrial trends survey will show orders picking up, but only after a long period of stagnation.

The picture of corporate sluggishness is reinforced by figures out today showing that company profits are still well down on levels before the recession and unlikely to improve in the short term.

CCN Group, in its latest health check of UK companies, claims that corporate profitability peaked in the second quarter in 1995 and has not moved since. It says profitability is still just two-thirds of pre-recession levels.

"There have been too many false dawns over the last three years, with confusing and contradictory signals coming from many different commentators," says David Coates, director of CCN.

"Manufacturing industry technically moved back into recession after two quarters of falling output earlier this year, trade with the European Union is in decline without being compensated by exports outside the EU and the current cut-price consumer boom is not sustainable."

All of this will strengthen Mr Clarke's hand should he opt to go for an autumn of tax and base rate cuts. But that would bring him into direct conflict with the Governor of the Bank of England, Eddie George.

The minutes of their meeting on July 3 show that Mr George advised the Chancellor strongly against any further rate cuts following the quarter point reduction in June.

He also warned that the June cut had probably brought forward the time when interest rates would have to rise.