UK wage growth remains strong, maintaining pressure on inflation. This development complicates hopes for an interest rate cut by the Bank of England.
Official figures show a solid increase in nominal weekly earnings, excluding bonuses. However, the labour market is showing signs of slowing down, adding further complexity to the economic outlook.
Strong Wage Growth Maintained
Official figures from the Office for National Statistics (ONS) revealed that nominal weekly earnings, excluding bonuses, rose by 6% from February to April. This increase remains consistent with the previous period and is slightly below the 6.1% forecast. Additionally, weekly earnings, including bonuses, held steady at 5.9%, exceeding the 5.7% expectation by economists.
This robust wage growth follows the 10% hike in the national living wage for workers over 21 from the 1st of April, bringing it to £11.44. It marks the first time in nearly a year that the headline earnings figure has not decreased.
Impact on Interest Rate Cuts
The resilient wage growth is likely to delay the UK’s first interest rate cut since 2020. Financial markets are now expecting a reduction from 5.25% to 5% in September.
Investors initially predicted up to seven rate cuts this year. However, expectations have shifted to only two or three. Rob Wood, chief UK economist at Pantheon Macroeconomics, stated, ‘Cutting rates with wage growth close to 6% would be unusual,’ suggesting a potential wait until September by the Monetary Policy Committee (MPC).
Labour Market Indicators Showing Strain
Although wage growth remains strong, other labour market indicators show signs of strain.
The number of vacancies fell by 12,000 to 904,000, continuing nearly two years of declines. The overall employment rate also dropped to 74.3%, a three-year low.
Monthly payroll growth has declined in April and May. The economic inactivity rate rose to 22.3%, the highest since 2015, increasing pressure to keep people in work.
Unemployment and Benefit Claims Rising
The unemployment rate for the same period increased from 4.3% to 4.4%, the highest since September 2021. This estimate is provisional due to lower response rates to the ONS workforce survey.
Benefit claimants rose by 50,400 between March and April, the largest monthly rise since the pandemic.
Future Expectations and Economic Predictions
Economists at Capital Economics predict the MPC will vote for a rate cut in August, assuming other indicators such as pay settlements and next week’s inflation data show progress.
Forecasters expect headline consumer price inflation to have dropped from 2.3% to 2% in May, meeting the Bank’s target for the first time since 2021. However, inflation is expected to stay above 2% for most of the year post-May.
Separate surveys, including the Bank’s decision-makers’ panel, indicate that companies are reducing their wage bill forecasts for the coming year to around 4%. Economists believe earnings growth needs to drop to 2-3% for inflation to decline and remain at the Bank’s 2% target.
Perspective from Analysts and Experts
The Resolution Foundation, a think-tank, highlighted that the next government will need to address a slowing labour market and falling employment rather than high price growth.
‘Average earnings remain more than £14,000 a year below their pre-financial crisis path after 16 years of wage stagnation,’ noted principal economist Nye Cominetti.
Despite robust earnings figures, the labour market’s underlying health looks concerning.
Implications on Future Economic Policies
The upcoming economic policies must balance between managing inflation and supporting the slowing labour market.
With the general election approaching on 4th July, the Bank of England’s Monetary Policy Committee is poised to keep interest rates unchanged for the tenth consecutive month.
Markets and Investor Sentiments
The financial markets are closely monitoring the wage growth and its implications on future rate cuts and economic stability.
In summary, the robust wage growth complicates hopes for an imminent interest rate cut. Meanwhile, the labour market is showing signs of strain, indicating a complex economic outlook.
The upcoming decisions by the Bank of England and economic policies of the new government will be pivotal in shaping the UK’s economic future.
