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FTSE 100 nears record highs—here's why

Dhara Ranasinghe
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The U.K. will see its first real wage growth this year since 2007, a survey on Monday showed, in the latest upbeat economic news that has helped push the blue-chip FTSE-100 stock index to within striking distance of record highs.

Real wages—or income adjusted for inflation—are set to rise 1.9 percent this year and accelerate from there, economic forecaster EY ITEM Club said in a report on the labor market.

It marks yet another piece of positive news for the U.K. economy, and on Monday, the U.K.'s benchmark index rose as high as 6,943 – within sight of a record high set in late 1999 at 6,950.

Simon Dawson | Bloomberg | Getty Images

"The December 1999 all-time has become a major psychological barrier for investors in recent years. In the past two years The FTSE 100 has repeatedly come close to reaching a new all-time high and on 20 separate trading days it has come within 100 points," Adrian Lowcock, head of investing at AXA Wealth, said in note.

News on Friday that euro zone negotiators agreed to extend Greece's bailout package also helps explain the strong gains in the index, analysts said.

"An agreement with Greece to extend its current bailout by four months, a boost to the U.K. economy from lower oil prices and improved economic outlook could mean that 2015 is finally the year the FTSE 100 breaks through the barrier.  Once through, the market may well go on to set repeatedly new highs as we have seen happen in both the S&P 500 and the U.K.'s own FTSE 250 in recent years," he added.

FTSE-100 10-year chart

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A generally improving outlook for the U.K. paints a positive backdrop for the economy ahead of May's general election, which so far appears too close to call.

Data last week showed the U.K. unemployment rate fell to 5.7 percent in the three months to December, marking the lowest level since 2008.

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Inflation in the country is also falling, and is one reason why wages might—at last—be about to overtake price growth. The latest data showed U.K. consumer prices rose 0.3 percent in January on an annual basis, the lowest level since records began in 1989

"Real earnings have fallen by nearly 10 percent since 2008, but workers will finally see more money in their pockets this year," Martin Beck, senior economic advisor to the EY ITEM Club, said in a statement.

"However, this is not a normal recovery. The move towards later retirement and the huge increase in the size of the workforce has depressed real wages as workers have priced themselves into jobs. We don't expect a return to boom time wage growth any time soon."

The EY ITEM Club said it expects strong growth in the workforce to remain a dominant feature of the labor market over the next four years. It expects the labor market to expand by over 1.2 million people between 2014 and 2018, growing at an average rate of 0.9 percent a year.

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