UNEMPLOYMENT is set to rise in the UK as a result of a slowdown in economic growth, according to the latest economic forecast.

Prospects for pay also look gloomy, said the EY Item Club, the only non-governmental economic forecasting group to use the HM Treasury’s model of the UK economy.

“Our expectation that a revival in pay growth is unlikely will be bad news for the public finances and present another challenge for whoever takes the reins of economic policy after the election,” said senior economic advisor Martin Beck.

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While economic activity has held up better than expected since last summer, according to the report, there are signs, particularly in the consumer sector, that the pace of expansion is slowing.

This will feed into weaker demand for workers resulting in UK employment falling for the first time since 2009, says the report.

Having risen by 1.4 per cent in 2016, the club predicts the number of people in work is set to increase by a modest 0.6 per cent this year, before shrinking 0.1 per cent in 2018.

Overall, growth in the economically-active population is forecast to slow from 0.9 per cent to 0.4 per cent this year.

As a result, the club expects the unemployment rate to rise from 4.8 per cent this year to 5.4 per cent in 2018 and 5.8 per cent the following year.

Prospects for pay look gloomy with automation an additional drag on pay rises.

The report says average earnings growth will remain well below the norm prior to the financial crisis.

Prospects for growth in real, inflation-adjusted pay look even less bright. Rises in consumer prices in both 2017 and 2018 are expected to be close to growth in cash pay, implying negligible growth in real earnings.

“Rising employment and falling unemployment have yielded a record low jobless rate, but this has yet to translate into any meaningful boost to pay growth,” said Beck.

“In explaining this, a shift towards less secure and, on average, less well-paid, part-time and self-employed jobs may have dampened workers’ willingness to push for higher wage demands.”

With the potential for technology and machines to displace some workers, the digital revolution is likely to increase the number of people competing for other jobs, putting downward pressure on wages in more labour-intensive and low-productivity sectors where machine advances are less applicable.

“Businesses need to take a closer look at their future skills needs,” said Mark Gregory, EY’s chief economist.

“They will need to assess how to strike the right balance between allocating capital on skills development, labour savings and labour enhancing technology.

“This will ensure that they have a workforce fit for their future business strategy.”

Beck added: “On a positive note, slower growth in the workforce may deliver a boost to what has been a long period of insipid productivity growth.

“With the flow of potential workers slowing, firms are likely to have more incentive to invest in improving efficiency or labour-saving technology.

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