Supply chains may struggle to keep pace, with low wages in Eastern Europe set to rise, especially when global businesses trade in US dollars, predicts IHS Markit
Businesses looking outside the UK to source manufacturing are capitalising on lower Eastern European wages, says IHS Markit. But they need to be aware that manufacturing wages pressures vary widely, particularly when reported in US dollars, as is common with many global businesses.
The UK is a case in point, where accelerating prices, due to a weaker pound, are likely to keep real wage growth in negative territory in 2018, says IHS Markit. Its analysts predict that consumer price inflation will remain around 3% in the early months of 2018, higher than the predicted 2-2.5% wage growth. While the US dollar-based graph above shows a drop in UK manufacturing wages year-on-year, caused by the devaluation in the pound against other currencies, when reported in sterling, the figure shows a lacklustre growth of 2.1% for 2018, which will still fall short of inflation.
Manufacturing activity in the UK is expected to slowly deteriorate as uncertainty over Brexit negotiations dampens business sentiment, with employment numbers starting to reflect this. After two years of almost uninterrupted growth, UK employment declined for the second time in the third quarter of 2017, shrinking by 56,000 in the three months ending in October. While unemployment in the UK remains at 4.3%, its lowest since 1975, the weaker employment intentions in the three months to October are better aligned with an economy that is experiencing growth tensions and Brexit-related uncertainties. With business prospects down and input costs up, companies are under pressure to keep a lid on wage growth to limit total costs, according to IHS Markit.
In Eastern Europe, manufacturing firms cite a shortage of labour as limiting production, suggesting that wage pressures are mounting. From January, minimum wages in the Czech Republic, Serbia and Bulgaria increased by 10%, to improve living standards. As a result, the hourly wage in these countries are expected to rise on average by 4.3%, 2.5% and 10% in these countries’ respective currencies. A 17% hike of the Ukrainian minimum wage is likely to support manufacturing wage growth of more than 8% over the year. The Polish and Romanian governments are also planning to raise national minimum wages to further stimulate consumer spending and therefore GDP growth.
While the Polish minimum wage is likely to increase by 4%, Romania is expected to boost the hourly minimum wage by 31% however the majority of this increase will be offset by a transfer of social contributions from employer to employee. IHS Markit expects local currency wage growth to average 5% in Poland and 4% in Romania over the year.
Egypt shows the most dramatic decline in wages when measured in US dollars, due primarily to the Egyptian pound devaluation in 2016. This drove inflation up to 30% last year, putting incredible pressure on wages. Inflation is expected to fall back to 17% in 2018, providing some relief. But, while wages are desperately trying to keep pace – rising by roughly 20% in 2017 and 12% in 2018 – they will fail to reach positive growth in real terms, predicts IHS Markit, particularly when viewed in US dollar terms. Bouts of moderate volatility of the Egyptian pound will be driven by continued weakness in key foreign exchange earners including tourism, Suez Canal receipts, and petroleum exports, as well as domestic concerns over surging inflation.
However, there have been signs of recovery, albeit it off a low base, which, combined with improvements in other key foreign exchange earners like remittances, foreign direct investment and portfolio inflows, creates some upside potential in the near term for the currency.
Tight monetary policy should help provide further underlying support and Egypt’s improving overall economic conditions will continue to attract investment into the country while containing and potentially narrowing further the country’s trade deficit, boosting the pound.
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