Economic commentary - March 2009

Pay rises began a sharp fall during January as pay freezes replaced one in four of the settlements due during the month.

Figures released by IRS, CELRE's partner organisation within the XpertHR Group, show a headline rate of settlements of just 3% for the three months to the end of January 2009 - down from 3.8% on the figure the previous month.

With inflation now falling fast, increasing numbers of companies announcing job losses, and the effects of last autumn's 3.8% rise in the national minimum wage working its way out of the system, the prospect now must be one of further decline in the level of pay awards overall.

January is one of the busiest months in the pay settlement calendar (XpertHR subscription required), with around 25% of all awards falling due. It also sets a benchmark for companies with an April pay round, when a further 40% of settlements are usually made.

However, this year's pay round has been overshadowed by the shock effects of the UK and world recession.

The UK formally went into recession at the end of December 2008, when official figures showed that GDP had fallen for two consecutive quarters.

There is no sign yet that the economy has stopped shrinking, and the Bank of England expects the decline to continue throughout the first quarter of 2009 and beyond before reaching a turning point.

The Bank's projections, taken from its Quarterly Inflation Report for February 2008, can be seen in the green chart, with the darker colours representing the more likely future course of events and lighter shades showing a wide spread of possibilities.

Inflation, as measured on the government's preferred Consumer Price Index, has now fallen from 5.2% in September 2008 to 3% in January 2009.

As the red chart shows, CPI is expected to continue to fall and may well edge into negative figures towards the end of 2009.

The Retail Price Index measure of inflation - which has historically been the measure most widely used by pay setters - has fallen from 5% at its peak in September 2008 to just 0.1% in January 2009, and is almost certain to fall below zero very soon.

As the economy has ground to a halt, the number of job vacancies has fallen and the number of redundancies has risen. Britain is now on the verge of having 2 million unemployed.

It is these wider factors - falling demand, falling employment, falling prices and falling confidence - that have forced pay settlements down.

With inflation now so low, many employees may see more benefit in keeping a job at the expense of a pay rise this year.

However, there has also been talk of pay cuts, and computer giant Hewlett-Packard made headlines in February after announcing plans to cut pay by as much as 20% for those in the top jobs and by 10% to 15% for other managers.

In the UK, where the law offers considerable protection against pay cuts (XpertHR subscription required), the company is reported to be approaching individual workers for their consent to reduce pay.

Widespread pay cuts may not yet be on the cards, but in the current climate, the number of pay freezes - and shorter pay pauses which lengthen into year-long freezes - looks set to increase in the coming months.

• Go to CELRE key bargaining statistics for March 2009
• Go to CELRE economic commentary for February 2009