UK Wage Growth Reaches Lowest Level in Two Years
In May, the UK experienced its slowest wage growth in two years, reflecting a cooling jobs market. This development poses a significant challenge for the Bank of England as policymakers contemplate whether to cut interest rates. Data from the Office for National Statistics (ONS) revealed that annual pay growth decreased from 5.9% in the three months to April to 5.7% in the three months to May, aligning with economists’ predictions.
Unemployment and Job Vacancies
The unemployment rate remained steady at 4.4% in April, while the number of job vacancies dropped by 30,000. This decline was primarily driven by reduced demand in the retail and hospitality sectors, indicating a continued slowdown in hiring across the economy.
Real Wage Growth on the Rise
Despite the overall cooling of wage growth, real wage growth, which accounts for the rising cost of living, has strengthened. Total real pay, including bonuses, increased by 3% year-on-year in the three months to May. The last time growth was higher was in the three months to August 2021, when it reached 4.5%.
ONS Insights on Labor Market Trends
Liz McKeown, the ONS director of economic statistics, commented on the current labor market trends, stating, “We continue to see overall some signs of a cooling in the labor market, with the growth in the number of employees on the payroll weakening over the medium term and unemployment gradually increasing.” She also noted that while earnings growth in cash terms remains relatively strong, it is showing signs of slowing. However, with inflation falling, real terms earnings are at their highest rate in over two and a half years.
Bank of England’s Interest Rate Decision
Financial markets anticipate that the Bank of England will refrain from cutting interest rates from the current level of 5.25% at their meeting on August 1. Policymakers are likely to wait until they are confident that inflation will remain close to the government’s 2% target before reducing borrowing costs.
Inflation and Wage Growth Concerns
The Bank of England has previously warned that inflation might exceed 2% this year due to resilient wage growth and price increases in the service sector. Recent data showed that headline inflation unexpectedly stayed at 2% in June for the second consecutive month. Additionally, underlying measures from the service sector remained steady, dampening hopes for an August rate cut.
Economists’ Perspectives on Wage Growth
Although wage growth is decelerating, economists argue that at 5.7%, it is still inconsistent with the Bank’s 2% inflation target. Ashley Webb, a UK economist at Capital Economics, stated that the slowdown in the jobs market is likely insufficient to counterbalance the strength in services inflation. “As a result, we have changed our forecast for the timing of the first interest rate cut from August to September, although it is a close call,” he said.
Bank of England’s Cautious Approach
Several members of the Bank’s monetary policy committee, including its chief economist Huw Pill, have expressed concerns that service sector inflation and a tight jobs market might necessitate a cautious approach from the Bank. The complexity of the situation is further compounded by the quality of ONS data, which has been affected by a decline in survey responses since the Covid pandemic. The ONS is updating its survey methodology to address these challenges but has announced a six-month delay in its implementation.
Resilient Pay Amidst Cooling Market
Greg Thwaites, a research director at the Resolution Foundation think tank, noted that pay packets are “proving mightily resilient” despite a cooling labor market. He added, “Rising real wages are good news for workers coming out of the cost of living crisis. But the Bank of England will be concerned that because these are not productivity-enhanced pay rises, they could turn out to be inflation-generating ones. The high-strength pay data and low-quality jobs data further complicate plans to cut interest rates.”
Conclusion
The current economic landscape in the UK presents a complex scenario for the Bank of England. With wage growth slowing and real wages rising amid falling inflation, policymakers face tough decisions ahead. The balance between maintaining inflation targets and supporting a cooling job market will be crucial in shaping the UK’s economic future.