U.K. workers suffer first pay squeeze since 2014

LONDON (Reuters) — British pay growth lagged inflation for the first time in two-and-a-half years in early 2017, underscoring the growing Brexit squeeze facing many households, official data showed on Wednesday.

Prime Minister Theresa May, who has called a national election for June 8, will probably draw attention to the lowest unemployment rate in nearly 42 years as companies continued to hire workers at a fast pace.

But pay excluding bonuses rose by 2.1 per cent year-on-year, the weakest increase since July and below expectations for a 2.2 percent rise in a Reuters poll of economists.

That meant regular pay, when adjusted for inflation, fell by 0.2 per cent in the first three months of the year, the first fall since the third quarter of 2014.

Britain's opposition Labour Party has made weak wage growth one of its main themes ahead of the election. It has promised a higher minimum wage and the end to a cap on public sector pay.

May has told voters she too is aware of the squeeze on their spending power and said she will cap energy prices, breaking with the Conservative Party's usually pro-market stance.

While wage growth is weak, there are other signs of continued strength in the British labour market.

The unemployment rate in the January-March period unexpectedly fell to its lowest level in nearly 42 years at 4.6 per cent. Economists polled by Reuters had expected the rate to remain at 4.7 per cent.

And the number of people in work rose by a strong 122,000 — the biggest increase since before the EU referendum last year - taking the employment rate to a new record of 74.8 per cent, the Office for National Statistics said.

Overall, the data is likely to bolster the BoE's view that it should keep interest rates at a record just above zero, despite the sharp rise in inflation so far this year which is likely to hit 3 per cent before long, according to economists.

The BoE says that despite the fall in unemployment, there is little pressure on employers to raise pay sharply which could feed a more permanent inflation problem.

Employers plan to increase pay by just 1 per cent in the year ahead, the weakest rate since 2013, a survey showed earlier this week.

The BoE said on Wednesday there was little sign that companies planned to raise annual pay awards above the 2.0-2.5 per cent level of recent quarters.

Another survey published earlier on Wednesday showed inflation gnawed further into the budgets of British households this month, resulting in the sharpest fall in cash available to spend in two-and-a-half years.

Separately, Wednesday's ONS data provided some relief for employers who have said they are worried that migrant workers are being discouraged from coming to Britain because of the fall in the value of the pound since the Brexit vote and uncertainty about their future status in the country.

The number of workers in Britain from the other 27 European Union countries rose by 50,000 to just under 2.34 million in the first three months of 2017. The figure fell by 50,000 in the last three months of 2016.

The ONS also said productivity, one of the weak points of Britain's economy, fell sharply during the first quarter. Output per hour declined 0.5 per cent compared with the fourth quarter, the biggest drop since the end of 2015.