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mpc: 5 14 Elsewhere, construction activity was buoyant. There had been a downward revision to services output growth in the second half of last year, but survey evidence from the Chartered Institute of Purchasing and Supply (CIPS) and from the CBI suggested that services activity was growing strongly again and that optimism in financial and business services was also recovering. While retail sales had risen sharply in February, the three-month growth rate had eased though the twelve-month growth rate had not done so. Consumer confidence had weakened a little.

The labour market

15 Conditions in the labour market remained surprisingly benign. Unemployment was rising less strongly than the Committee had projected in February (if at all, on the claimant count measure) and there had been little change in the inflows into unemployment, which were still below the average of last year. At the same time, earnings growth was rather weaker than projected and was currently well below last year's levels. This was accounted for by two factors: first, the rate of growth of regular pay per head had eased, driven in large part by falls in paid overtime and in average hours; second, there was a substantial negative contribution from bonuses, substantial in part because the share of bonuses in overall pay was well above average at this time of year. Pay settlements too were rather lower than a year ago. If unemployment remained low and activity picked up, average hours ­ and with it, regular pay per head ­ could recover quite quickly. The size of the bonus contribution should also fall, even if the rate of fall of bonuses itself did not ease, as the main bonus season passed. But it was difficult to judge the likely implications of a recovery in nominal earnings growth for prices, as productivity growth had also been very weak in recent months. It was plausible that productivity would recover as activity picked up and any hoarded labour was again used to its full potential. 16 One suggested explanation of these outturns was that remuneration arrangements had become more flexible in recent years. Bonuses were now a more important component of pay and, if they were more responsive than regular pay to changes in corporate profitability, it would be reasonable to expect that there would be more volatility in hours worked and in earnings per head, and less in heads employed. Others noted, however, that greater labour market flexibility could also be associated with lower hiring and firing costs, which would suggest greater variability in numbers employed in response to shocks. There was a marked contrast, too, between this UK experience and the substantial labour shedding in the United States in response to the downturn in demand. It was surprising that inflows to unemployment had not picked up here. This suggested either that announced redundancies had not yet been implemented, or that they were not in fact large relative to recruitment elsewhere in