UK workers face ‘lost decade’ of wage growth


British workers face a "lost decade" of real wage growth, financial services firm EY warned on Monday, with the "squeezed middle" and young people set to feel the brunt.

Real take-home pay will lag pre-crisis levels until 2017, as will annual wage growth, according to a report by EY's ITEM Club, which produces economic forecasts. For the next three years, it sees annual wage growth at "well below" the 4.5-5 percent rates typical before the global economic crisis of 2007/08.

EY's report said weak wage growth has been driven by an increasing supply of workers in the U.K., and this was likely to have a knock-on effect on consumer spending.

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"Households are facing a lost decade of real wage growth, which will mean consumer spending growth will be low by historic standards," the ITEM Club said.

'Squeezed middle'

Consumer spending is expected to rise at just over 2 percent next year, a drop on the average annual growth of 3.7 percent seen in the pre-crisis decade.

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The report comes as the U.K. economy powers ahead, having growth 0.8 percent in the second quarter of this year. Bank of England Governor Mark Carney said in a speech last week that a hike to record-low interest rates was "getting closer"—a move economists expect to come early next year.

However, the population as whole will not benefit from the improving economy, according to EY. The so-called "squeezed middle" will see spending power rise slower than their higher- and lower-paid peers, it warned.

Why is wage growth so low in the UK?

In addition, those in their 20s and 30s will see their spending power squeezed, with their age group suffering from both an unemployment rate above the national average and a buoyant housing market that forces them to save for larger deposits. However, a surge in the number of older workers, as well as a guarantee by the government to increase pensions by either 2.5 percent or the rate of inflation if it is higher, means the over 65s will be better off.

"Over the next few years our expectation is that the winners in the income wars will be older households, while the young will continue to face significant obstacles to a decent rise in disposable incomes," Martin Beck, senior economic advisor to the ITEM Club, said in a press release.

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Spending on tobacco and alcohol is set to fall 2.6 percent this year, while purchases of food and non-alcoholic drinks will rise by a modest 1.5 percent per annum over the next five years.

Non-essential goods and services such as hotels and technology will see a big bump in consumer spending, with people after the latest gadgets such as wearables, EY said.

- By CNBC's Arjun Kharpal