UK Unemployment Rate Falls as Wage Growth Slows Further

The UK's unemployment rate edged down to 4.1% in the May-July period, according to data released by the Office for National Statistics (ONS). This figure matches economists' expectations and reflects a minor decrease from the 4.2% recorded in the previous period (April-June 2023).

The employment rate during this time stood at 74.8%, while wage growth, excluding bonuses, increased by 5.1% year-on-year. Including bonuses, wage growth was 4%, marking a slowdown compared to previous months. Adjusted for inflation, real total pay rose by 1.1%, and regular pay increased by 2.2% on an annual basis.

Wage Growth Continues to Decelerate

While wage increases have outpaced inflation, there are signs of further deceleration, attributed to the Bank of England's (BoE) interest rate policies aimed at controlling inflation. The 5.1% wage growth (excluding bonuses) in the three months to July marks the lowest rate in over two years, aligning with predictions of an easing in inflationary pressures.

However, even with this slowdown, labour costs remain a concern. The BoE remains cautious as rising wages, particularly in labour-intensive sectors like healthcare and social services, could push inflation back up. In July alone, the UK lost 42,000 workdays to strikes, primarily in the healthcare and social services sectors.

Economic Experts Weigh In

Jack Kennedy, an economist at the job platform Indeed, noted that the gradual easing of wage growth could pave the way for further interest rate cuts by the BoE before the end of the year. However, he added that the bank would likely need to see more progress before making any decisions.

Despite signs of easing price pressures, investors expect the BoE to keep the base interest rate steady at its upcoming meeting. Concerns persist that businesses in service industries might hike prices sharply to offset higher wage costs, potentially delaying the central bank’s goal of bringing inflation back to its 2% target.

Enrique Diaz-Alvarez, an economist at financial services firm Ebury, commented that the July labour market data supports the view of a robust labour market, which continues to underpin consumer demand. He emphasized that wages are still outpacing inflation, at least for now.

ING economists echoed this sentiment, suggesting that while the BoE is likely to remain cautious at its next meeting, it may take more decisive action to stimulate the economy in the coming months if growth continues to falter. They predicted that interest rate cuts could accelerate as early as November, with both the BoE and the US Federal Reserve potentially moving in similar directions.

Looking Ahead

While the drop in unemployment and deceleration in wage growth are promising signs for inflation control, policymakers remain vigilant as the labour market’s health and wage pressures still present risks to the broader economic outlook. As the BoE prepares for its next steps, all eyes will be on how these trends evolve in the coming months.