Economic commentary - September 2009

The recession is at an end. That is not official - and won't be until the Office for National Statistics publishes figures for the third quarter of 2009, which are now increasingly expected to show that the economy has started to grow once again.

Keep an eye out for those statistics some time towards the end of October, writes XpertHR head of salary surveys and data benchmarking services Mark Crail.

But there is a growing consensus that, slowly and uncertainly, we are beginning to claw our way out of the long downward spiral in our Gross Domestic Product. Most recently, the Institute of Chartered Accountants predicted economic growth of 0.5% for the third quarter of the year, and said business confidence among its members was also rising.

There is, however, a big difference between the technical end of a recession and a recovery. Unemployment is continuing to grow and will do so for some time to come. We can expect to see some substantial reductions in jobs in the public sector whoever wins the next general election as the government looks for ways of clawing back the huge sums it spent preventing a general collapse in the entire economic system at the start of the year.

It may take years to climb out of the trough into which the economy has fallen and to get us back to the levels of economic output we saw in 2007.

Business confidence generally will also not be strong enough for companies to start taking on new people for some time to come. The result will be too many people chasing too few jobs - which brings us to pay.

The latest IRS pay data (subscription required), published exclusively on XpertHR, shows that the headline rate of pay settlements across the whole economy fell to just 1.0% for the three months to the end of July 2009. The upper quartile figure also fell to 2.0%, while the lower quartile remains at zero. Four in ten pay reviews monitored by Industrial Relations Services now result in pay freezes - and in the private sector freezes account for more than half of all settlements.

With inflation remaining at historically low levels, downward pressure from government on public sector pay settlements over the coming months, and the National Minimum Wage set to rise by just 1.2% in October 2009, pay settlements to the end of this year and beyond will remain subdued to say the least.

So what of 2010? Companies which froze pay in 2009 will need to look carefully at their competitive position. The labour market may be easier than it has been for many years, but to retain their best staff, employers will need to at least match the pay levels of their competitors.

Those which did not freeze pay in 2009 will need to make similar assessments about their own competitive situation, but with a focus on affordability. Reliable pay data and intelligence on pay trends will be an essential tool for all HR and reward practitioners this autumn.