Pay deals are set to fall below 3 per cent this month because of lower inflation and the economic downturn.

Settlements averaged 3 per cent in the three months to December, but a snapshot of 30 agreements this month revealed deals were running at 2.1 per cent.

Analysts Industrial Relations Services (IRS) said its research suggested a downturn in settlements in the coming months.

Jeremy Baugh of IRS said: "A combination of falling inflation and easing labour market conditions looks set to translate into a dip in settlement levels in the early part of the year."