Average earnings grew by an underlying 3.75 per cent in the year to May, the Department of Employment said. The rate fell unexpectedly from 4 per cent in May, pulled down by the Government's 1.5 per cent limit on public sector pay increases.
Fears that recovery may be stalling were fuelled as unemployment rose for the first time in six months, with the seasonally-adjusted total increasing by 200 in July to 2,912,200. The rise was small and in line with City forecasts. Unemployment actually fell in all regions except northern England, Wales, Scotland and Northern Ireland. Some 10.4 per cent of workers are now without work and claiming benefit. But a 7,900 rise in JobCentre vacancies pointed to a reviving labour market.
In addition to the jobless rise, factory output dropped by 2.1 per cent in the previous month, its biggest monthly fall for five years. June's fall may mean the non-oil economy did not grow quite as quickly in the second quarter as first thought.
Hopes of lower rates pushed share prices to a fresh record high, depressed the pound and helped short-dated gilts prices emerge relatively unscathed from profit-taking in the government debt market. The FT-SE index of 100 leading shares ended the day 3 points higher at 3,009.1 in busy trading. The index reached an all-time intra-day high of 3,022.4 in the morning.
Long- and medium-dated gilt prices fell sharply as dealers took profits from the recent rally. The long-dated 9 per cent stock due 2008 dropped pounds 21 32 to pounds 1149 16 . The prospect of a base rate cut helped protect short-dated stock, with the 10 per cent due 1996 falling just pounds 3 16 to pounds 11111 32 .
The pound ended the day half a point lower against a basket of currencies at 80.3 per cent of its 1985 value. It fell 1.35 pfennigs against the German mark to DM2.5175 and 1.22 cents against the US dollar to dollars 1.4615.
Ian Shepherdson, of Midland Global Markets, said pressure for a rate cut could well gather pace as the revival in factory output stalled and unemployment rose again for some months: 'There is still plenty of disinflationary pressure in the economy. It needs another good kick.'
The average earnings figures contributed to speculation about a rate cut - perhaps as a sweetener for the Conservative Party conference - by appearing to back the Bank of England's view that inflation is increasingly unlikely to breach the Government's 4 per cent target ceiling in the next two years. Earnings growth has fallen by 1.25 points since the beginning of the year and has more than halved in the past 12 months.
This slowdown has been driven largely by sharp falls in public sector pay increases, which have produced a big drop in earnings growth in the service sector. Two-thirds of service sector workers are in the public sector. The Government has imposed a 1.5 per cent limit on increases, although the Treasury has now decided that it would be impossible to impose it for a second successive year.
Service sector earnings growth fell to an underlying 2.75 per cent in the year to June, having fallen in 11 of the past 12 months. In contrast, annual earnings growth in manufacturing has remained unchanged at 5 per cent since February.
June saw a 2.75 per cent pay increase agreed by the agricultural wages board, down from 4 per cent in 1992. University academics received the standard 1.5 per cent for the public sector, down from 4.9 per cent.
Next month is expected to see a further slowdown in service sector earnings growth, with a host of 1.5 per cent public sector settlements taking effect. These include British Rail workers, some civil service grades, several groups of National Health Service employees and the police.
The Employment Department will today publish figures for manufacturing productivity and unit wage costs - the amount spent on wages and salaries to produce each unit of output. Kevin Gardiner, chief economist at Warburg Securities, estimated that unit wage costs in the second quarter would be 3.3 per cent lower than a year earlier, a slightly slower rate of decline than in the previous month. Unit wage cost growth is a key measure of international competitiveness.
Some economists fear economic growth in the third quarter will be relatively subdued in comparison with the first half of the year. This would increase pressure for an interest rate cut, which could help exporters by weakening the pound.
Chris Dillow, of Nomura Research, warned that unit wage costs in manufacturing would pick up next year, before accelerating rapidly in 1995: 'Productivity growth will come down with a clatter'.
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