Bank of England warns families to expect fall in living standards

In a blunt warning issued in a key report, the Bank also said that it is too early to conclude that unemployment has peaked.

It said that although thus far many workers had been willing to accept pay reductions, or reluctantly to work part-time, employees may have failed to realise that the costs of goods and services are likely to rise faster than their wages in coming months.

The Bank report said that one risk was that employees would be “unwilling to accept a further squeeze in real wage growth”, adding: “That could lead them to push for higher pay settlements this year. But if companies cannot afford the increase, then they may shed labour in order to contain labour costs.”

It said: “There remains a risk of further falls in employment if, for example, the recovery in demand proves more sluggish than businesses have expected. Businesses may respond to any future squeeze in profits by shedding staff.”

The warning comes amid worries that Britain could fall victim to a double-dip recession, slumping backwards no sooner than the economy had escaped it.

Such worries were reinforced further on Monday as a Bank policymaker and Monetary Policy Committee member Kate Barker conceded that the economy could shrink for a period this year.

It added that although most of its regional experts anticipate no major change in unemployment in the coming months, there is a significant chance that, with some companies vulnerable to demands from their creditors, businesses may feel they have no option other than to cut jobs further.

The report said this “may imply further redundancies if the economy does not grow sufficiently quickly.”

The report provides a “dose of realism” about the prospects for households and employment, according to John Philpott, chief economist of the Chartered Institute of Personnel and Development.

“As the Bank warns, the risk of further substantial job losses remains, especially if the economic recovery is as weak as most current indicators suggest,” he said.

“The likelihood of a 'jobs-light’ or, worse still, a 'jobs-loss’ recovery has been of concern to the CIPD for some time. What is equally sobering, however, is the Bank’s comment on another potential risk previously highlighted by the CIPD – that employees may be unwilling to accept the inevitability of a 'pay-tight’ recovery, with a squeeze on their real living standards.

“While pay restraint helped save jobs during the recession, the dawning realisation that this will have to continue for some considerable time if jobs are not to be lost during the recovery will test the goodwill of UK workers to the limit.”

In comments which are likely to irritate the Government, the Bank also pointed out that the public spending cuts pledged by both political parties would also weigh heavy on the jobs market.

Unemployment rose to 2.5 million during the recession, failing to reach the peaks of 3 million some economists had predicted. However, the Bank’s warning serves as a reminder that it is too early still to presume the worst has now passed for employment.

Source: London Telegraph