The UK labour market has presented a mixed picture in the second quarter of the year, with the unemployment rate unexpectedly falling and wage growth slipping to a two-year low. These developments provide conflicting signals for the Bank of England’s rate-setting Monetary Policy Committee (MPC) as they navigate the path of interest rates.
According to the Office for National Statistics (ONS), the unemployment rate in Britain fell from 4.4% to 4.2% in the three months to the end of June, defying economists’ expectations of a rise to 4.5%. This surprising decline suggests that the labour market may not be cooling as anticipated. However, the accuracy of the official unemployment measures has been questioned due to low response rates to the ONS’s monthly labour market survey.
On the wage front, a measure of weekly earnings growth, excluding bonuses, fell from 5.8% to 5.4% in the second quarter, marking the lowest level since July 2022. When including bonuses, wage growth declined even further, from 5.7% to 4.5%, the weakest measure since February 2021. The sharp drop in the latter was primarily caused by the one-off impact of NHS bonuses awarded last June.
The easing of wage pressures will likely be welcomed by the Bank of England, which recently began cutting interest rates but has cautioned that strong earnings growth must continue to fall to ensure stable inflation at the 2% target in the future. Other indicators of the labour market also presented a mixed picture. Payrolls rose by 24,000 in June, surpassing forecasts of 10,000, while the number of people claiming unemployment benefits increased by more than 135,000 last month, a significant jump from the 36,000 increase recorded in June. Economists attribute this sharp rise to the government’s decision to require some universal credit recipients to increase their working hours.
Job vacancies, a crucial measure of labour market tightness, fell for the 25th consecutive month by 26,000 to 884,000, while the inactivity rate remained steady at 22.2%. Financial markets anticipate at least two more interest rate reductions from the Bank of England this year, following the MPC’s decision to lower the base rate to 5% this month, marking the first reduction in four years.
Economists emphasise the need for a cautious and gradual easing cycle, with the possibility of the labour market tightening again due to stronger growth, potentially stalling the slowdown in wage growth. As the UK economy continues to navigate the post-pandemic landscape, the mixed signals from the labour market underscore the challenges faced by policymakers in striking the right balance between managing inflation and supporting economic growth.
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