By Daniel Hunter

Real-term wages will still lag behind pre-crisis levels in 2017, according to EY Item Club.

EY Item Club's research suggests that households are facing a "lost decade" of real wage growth which will restrict consumer spending by historical standards.

Consumer oriented businesses are facing a challenging environment, the research found.

EY ITEM Club believes the supply of workers will continue to grow at a robust rate. Even though the employment rate has already exceeded its pre-crisis peak, the report says that strong growth in employment will continue. As a consequence, it is likely that annual wage growth over the next three years will remain well below the 4.5%-5% rates typical before the crisis.

This will lead to a slowdown in the pace of consumer spending growth, which is only expected to increase by just over 2% next year and in 2016. This is a significant reduction on the average annual growth rate of 3.7% seen in the pre-crisis decade.

Martin Beck, senior economic advisor to the EY ITEM Club, said: “Total household incomes have strengthened because more people are in work but individuals do not have extra money in their pockets. Real wages are being held back by strong growth in the supply of workers and the fact that firms are facing increased non-wage costs, such as new pension schemes. We expect this trend to continue for several years to come and it will be mirrored with a slowdown in consumer spending growth.”

No respite for the ‘squeezed middle’

According to the report, competition for high-skilled workers means this group will enjoy the traditional returns associated with growth and innovation while those with the weakest earnings potential will be supported by changes to the minimum wage and tax allowances. However the ‘squeezed middle’ looks set to be in that position for some time to come, seeing spending power improve more slowly than their higher and lower-paid peers.

The outlook for incomes also differs across age groups. The EY ITEM Club says spending power for those in their 20s and 30s will continue to be squeezed by an unemployment rate well above the average and the need to save for larger deposits for house purchases in a continuously rising market.

On the other side of the coin, the triple lock guarantee on state pensions and increased participation in the labour market will benefit those aged above 65. The UK has already seen a surge in older workers, with the number of people over 65 in work now standing at around 1.1 million, 60% up on the level at the beginning of 2008.

Beck added: “Over the next few years our expectation is that the winners in the income wars will be older households while the young will continue to face significant obstacles to a decent rise in disposable incomes. The “squeezed middle” is also going to continue to struggle, as limited growth in disposable incomes, reflecting weak pay rises and the threat of jobs being automated, leaves them no choice but to remain frugal with their spending in the near future.”

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