Workers and households in the UK face five more years of tight budgets before wages return to their 2009 peak, despite the UK being on the verge of emerging from recession and being the biggest it has ever been.
The National Institute of Economic and Social Research (NIESR) predicts that GDP will grow by 2.9 per cent this year, an increase of 0.4 per cent on its estimate of just three months ago, though GDP per capita is not expected to exceed its 2008 peak before 2017.
Real-term wages are 6 per cent below those in 2009, with little chance of recovery until at least 2019.
And, crucially, despite a cut in unemployment, productivity growth - the “main driver” of prosperity - has fallen.
GDP forecasts for 2015 through to 2017 are about 2.4 per cent, although GDP per capita remains well below its previous peak.
Jonathan Portes, director of NIESR, told The Times: “The end of the Great Recession, it is an important moment. The British economy is very close to being bigger than it has ever been.
“Symbolically, that matters, and it comes at a time when growth is clearly entrenched.”
His colleague Jack Meaning, a research fellow at the institute, added: “We are incredibly close to the pre-recession peak. Whether we make it in the April estimate will be a matter of 0.1 per cent.”
Growth accelerated rapidly after the marginal gains of 2012, NIESR said, and is now running at around 3 per cent year-on-year.
But while wage levels are also expected to grow this year in real terms, they remain around 6 per cent below what they were in 2009 – ground that is not expected to be made up until at least 2018.
Unemployment rates are also improving, falling by 1 per cent over the last year. NIESR said it expects unemployment to average around 6.5 per cent this year before dropping to close to 6 per cent from 2015.
But despite the robust rise in employment, productivity growth has fallen.
“Even the return of GDP growth, however, has not yet resulted in significant productivity increases,” the report said.
“This matters in the short run, since without any improvement in productivity, robust economic growth will see spare capacity absorbed relatively quickly; it matters even more for the medium to long run since ultimately productivity is the main, if not the only, driver of real wages and overall prosperity.”
Inflation is also under control, NIESR said, in part because rises in wages are subdued, and the institute expects inflation to remain around the target of 2 per cent.
Yesterday the Bank of England announced it was keeping interest rates at their historic low of 0.5 per cent, a level they have been at for more than five years while the Bank tried to nurse the economy back to health.
It also left the scale of its quantitative easing programme to boost the money supply unchanged at £375 billion.
The Bank will update its own forecasts for GDP growth and inflation at its quarterly inflation report next week.
Meanwhile, the Organisation for Economic Co-operation and Development (OECD) has hiked its UK growth forecast to 3.2 per cent and sounded a warning that action may be needed to cool the housing market.
Figures from Halifax showing a second consecutive month-on-month fall in house prices in April – though they were 8.5 per cent up year-on-year – looked likely to ease concerns about an overheating market.
On the basis of current monetary policy, the NIESR said it expected public sector finances to be in surplus by 2018-19.