December 2024 monthly update

Read our December monthly update – a roundup of the latest financial news and economic headlines.

UK wage growth surges to 5.2%, lowers rate cut expectations

For the first time in over a year, wage growth has increased. As such, the Bank of England (BoE) is predicted to not cut interest rates this month. Official figures from the Office for National Statistics (ONS) show that regular earnings growth rose by 5.2% in the three months to October. This is more than expected and up from a revised 4.9% in the previous three months. Also, it outstripped inflation by 3% in a similar timeframe (with the Consumer Prices Index (CPI) considered).[1]

“After slowing steadily for over a year, growth in pay excluding bonuses increased slightly in the latest period, driven by stronger growth in private sector pay,” commented Liz McKeown, ONS Director of Economic Statistics. Pay for factory workers increased by 6%, widening the split between civil servants and the private sector. For the latter, annual average earnings growth was 5.4% while it was 4.3% for the public sector.[2]

In response, the pound sterling strengthened against the euro. Meanwhile, traders decreased their expectations of a quarter-point interest rate cut to less than 10% – implied by the levels in swaps markets. In early December, they were predicting three cuts by next year, but traders now expect two quarter-point rate cuts by the end of 2025 with a small chance of a third.[3]

BoE policymakers believe they will need time to analyse how employers are responding the changes announced in the Autumn Budget. They could try to offset higher tax costs by raising prices, squeezing pay, or cutting workforces. Due to this, some economists think wage growth will slow sharply in 2025. Although Hannah Slaughter, Senior Economist at the Resolution Foundation think-tank, stated that there are no cues of employers enacting large layoffs. Instead, she posits that the hiring rate is “not enough to keep up with a growing workforce”, citing the falling employment rate.[4]

Pension review put on hold to help businesses

Chancellor Rachel Reeves has put a review of workplace pensions on hold to avoid further strain on businesses after the National Insurance increase in the Autumn Budget. Originally, the review was to be launched before the end of 2024 but has now been postponed indefinitely. It was intended to address worries over inadequate retirement savings.[5]

Currently, auto-enrolment rules dictate that staff must pay 8% of earnings into a workplace pension. Of this, at least 3% must be contributed by their employer. Experts have voiced displeasure over Reeves’ decision, stating that failure to act could leave workers with an income shortfall in retirement. Phoenix Group, the UK’s largest retirement savings business, calculated that a minimum of 12% (total) would add an extra £10bn in annual pension contributions.[6]

Research by the Institute for Fiscal Studies (IFS) found that 30-40% of savers in defined contribution (DC) schemes are expected to have retirement incomes that fall below the minimum living standard set out by the Pensions and Lifetime Savings Association (PLSA). The PLSA have echoed Phoenix Group’s calls to increase auto-enrolment contributions to 12%. Furthermore, Phoenix found that a 15-year delay in implementing this rise could result in an average 18-year-old losing an estimated £35,000 in retirement savings.[7]

“A comprehensive review of the UK pension system is long overdue, and indeed this is why we at the IFS are currently working on our own Pensions Review,” announced Heidi Karjalainen, Senior Research Economist at the IFS. She added: “the Labour manifesto was absolutely right to commit to initiating a review of the UK pension system.” While the IFS wants the process to begin in 2025, it also hopes that the review will not be “rushed”. This way, changes affecting businesses can be gradually phased in.[8]

UK listed builders expected to build fewest houses in decade

Despite the government’s push to increase Britain’s housing supply, listed housebuilders are on track to complete the fewest number of new homes in a decade. This may be due to planning regulations and high mortgage rates restricting the market. Consequently, the housebuilding contraction poses a problem for the Labour Party, who recently launched sweeping planning reforms to boost construction.[9]

UK housebuilder, Vistry, issued its third profit warning in as many months, plunging the company’s shares to a two-year low. It now expects annual adjusted pre-tax profit of £250m, down from a prior expectation of £300m. In Vistry’s view, this was partly because of delays. A number of developments have not yet been completed and transactions with partners have been delayed until 2025. Other housebuilders reported similar falls – Persimmon and Barratt Redrow shares were down 2.4% and 0.5% respectively.[10]

Mortgage rates stayed higher than predicted in 2024, more than 5% on average. Since most of these companies’ clientele are bound by mortgages, with many being first-time buyers, borrowing costs have suffered from post-Budget concerns about interest rates. Analysts warn that the government is likely to miss its target of 1.5m new homes unless it is able to help first-time homeowners and provide much more funding for affordable housing.[11]