Should we be worried by softer pay growth?

We had expected the recent upward trend in nominal pay growth to come to a brief halt in April due to unfavourable base effects. But the drop in the annual growth rate of average earnings (excluding bonuses) from 3.0% in March to 2.5% in April was pretty disappointing and has cast some doubt over the likely strength of a recovery in earnings and consumer spending growth this year. But with the surveys suggesting that recruitment difficulties are building and the latest pay settlement surveys still strong, a (gradual) pick-up in wage growth looks in store. Taken together with falling inflation, the likely revival in real pay should underpin a modest spending recovery this year. Indeed, we continue to think that consumer spending growth will pick up from 1.1% in Q1 to 2% or so in mid-2019, rather than barely rise at all as the consensus expects.