The UK economy continues to show signs of cooling down, as official figures released on Tuesday revealed a slowdown in wage growth and a surprise drop in unemployment. This data may reassure the Bank of England that inflation pressures are easing, potentially paving the way for further interest rate cuts.
Average weekly earnings, excluding bonuses, grew by 5.4% in the three months to the end of June, down from 5.8% in the previous quarter and marking the lowest rate since August 2022. While this is still significantly higher than the Bank of England’s 2% inflation target, it indicates a potential slowdown in wage pressures.
The unemployment rate, based on a survey the Office for National Statistics (ONS) is currently revising, fell from 4.4% to 4.2%, its lowest level since February. This was contrary to economists’ expectations of a rise, and led to a strengthening of the British pound against the US dollar.
Despite the slowing wage growth, real wages are improving after adjusting for lower inflation. Real pay excluding bonuses is now 3.2% higher than a year ago, marking the joint-largest annual increase since mid-2021.
However, the number of job vacancies, while falling from a peak of 1.3 million in mid-2022, remains high at 884,000, suggesting continued labor market tightness.
The Bank of England, which cut interest rates on August 1 after keeping them at a 16-year high for nearly a year, is closely monitoring wage growth and inflation. Investors currently see a one-in-three chance of a further rate cut in September.
The Resolution Foundation think tank, however, expressed concerns that the ONS may still be undercounting people in work, which could imply a more robust labor market.
The government, aiming to raise labor force participation to 80%, is focused on getting more people into work. Chancellor Rachel Reeves emphasized the importance of this goal, highlighting that it will be addressed in the upcoming Budget on September 30th.
While the latest data suggest some easing of inflation pressures, the Bank of England will continue to monitor various factors, including labor shortages, which have been significant since the COVID-19 pandemic. The BoE is also focused on private-sector pay, which it forecasts will slow to 5% in late 2024 and 3% in late 2025.
