Honda became yesterday the latest leading employer to propose a pay decrease for its British staff as cuts and wage freezes ripple through the economy.

The carmaker, which has imposed a four-month shutdown at its Swindon factory, has followed its British-based competitors Toyota and Jaguar Land Rover in offering pay cuts rather than job losses in the face of a slump in demand.

Other manufacturers are likely to follow the move, fuelling fears of a downward spiral of falling incomes and prices that could drag the economy into a destructive deflationary rout.

Anxieties that freezes on pay and, for many workers, actual wage cuts could become the norm will mount today as the headline retail prices index (RPI) gauge of inflation turns negative for the first time in half a century. With RPI inflation used as a benchmark for wage deals by employers across the country, its plunge into negative territory raises the prospect of pay being pegged at present levels for millions of workers.

The City expects that annual inflation on the index will fall today from 0.1 per cent in January to a rate of between minus 0.5 and minus 0.8 per cent in the latest February figures. Even with inflation still in positive territory until now, pay freezes are already becoming far more prevalent – making up one in five of recent wage settlements, according to the pay research group Incomes Data Services (IDS).

There is evidence that pay cuts are becoming more widespread. Last week the Bank of England’s network of regional agents reported that “a growing minority of contacts [at businesses] intended to impose pay cuts”.

The Bank’s agents also found “wide-spread reports of plans for wage freezes”. Businesses have been telling the agents that “elevated concerns over job security had increased employees’ willingness to accept lower settlements”.

Ken Mulkearn, editor of IDS’s pay report, said that many pay rises and pay talks for many staff were also now being deferred while employers assessed the worsening economic situation. “Pay freezes in a way are only the tip of an iceberg,” he said.

The industrialist Sir Anthony Bam-ford called yesterday for wage subsidies for manufacturers to support employment during the recession.

Sir Anthony, chairman of the construction equipment manufacturer JCB, said that the Government should subsidise the wages of workers who have been put on reduced hours because of falling demand. “Wage support is a better way of doing things because it is less brutal and less black and white,” he told the Financial Times. He said that JCB would not benefit from such a scheme because it had already made 2,500 redundancies since 2007.

Concern over the worrying trends is being heightened as the economy’s new bout of deflation is expected to be much longer lasting in the present slump than for many decades.

Although inflation on the RPI measure was last negative in March 1960, it was below zero for only the first three months of that year, as well as in May and June of 1959. This time round, RPI inflation is tipped to remain negative until next spring – and to fall as far as minus 4 per cent.

In turn, that will put prolonged downward pressure on pay. “We are in uncharted territory,” Mr Mulkearn said. “The last time this happened was in 1960 but then it did not last very long. It was more of a blip.”

The British Chambers of Commerce expects that deflation, at least on the RPI figures, will last at least a year. David Kern, its chief economist, said: “Wage freezes will become much more widespread. When you’re looking at a pay freeze it is often the difference between having a job or not.”

For now some economists believe that a modest episode of deflation could actually boost the economy. Consumers, facing a squeeze on pay, will see spending power boosted by plunging fuel prices and falling mortgage costs that are driving inflation below zero. But the benefits are limited, as the costs of many other goods and services are continuing to rise.

The Bank of England’s benchmark for inflation, the alternative consumer prices index (CPI), while falling sharply, still remains firmly above zero – mainly since it excludes mortgage interest payments. It is tipped to stand at about 2.7 per cent in today’s figures.

While unions do not want to support pay cuts, they are proving increasingly willing to negotiate them in return for pledges on no compulsory job losses. Jim D’Avila, regional officer for the Unite union at Honda’s base in Swindon, said: “Honda is following Toyota’s lead. In return for no compulsory redundancies the company is asking the staff to accept cuts in pay.

“No decision has been made. Unite’s priority is to secure jobs and give our members a fighting chance of coming through this economic turmoil with their jobs and livelihoods intact.”

WINNERS AND LOSERS

— The biggest losers are easily identified. About 180,000 people have annuities linked to the retail prices index, according to the Association of British Insurers, and many of the providers of these, including big names such as AXA, Prudential and Standard Life, will automatically cut the income received on them in the event of deflation. Other providers, such as Norwich Union and Legal & General, have stated that payments will not fall but merely remain unchanged until the retail prices index begins rising again

— Savers whose rates are linked to the RPI also lose out, such as those who have bought products from National Savings & Investments

— Among the winners are people who have bought gilts — government IOUs — as these pay a fixed rate of interest, which is worth more when prices are falling

— Although it may not feel like it, anyone with money in the bank will be a winner. If prices are going into reverse, any bank account paying interest, however modest, is worth having

— Similarly, most people on state pensions can be regarded as winners. State pensions increase at the start of the tax year in line with where the RPI stood the previous September. Because the RPI was 5 per cent last September, it means that the weekly pension rises on April 6 from £90.70 to £95.24. In practice, the relative spending power of the state pension will vary according to each pensioner's personal rate of inflation, which — depending on council tax bills, for example — may exceed 5 per cent. If deflation continues until this September, pensioners will still get an increase, as the Government has pledged that state pensions will never rise by less than 2.5 per cent a year

— Some businesses will also benefit, again depending on their individual levels of deflation. If the costs of a business fall, then even if it is not raising prices for its customers, its margins will be improving. In reality, deflation is likely to hurt many businesses, as their costs are rising because of the collapse of sterling

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