UK wage growth stabilises amid economic challenges

Wage growth across the UK has held steady at 5.9 per cent during the three months to January, according to the latest figures from the Office for National Statistics (ONS). The data aligns with economists’ expectations and comes as the Bank of England opted to keep interest rates unchanged at 4.5 per cent in March.

The report highlights that private sector wages rose by 6.1 per cent, slightly lower than the Bank’s forecast of 6.2 per cent. In contrast, public sector pay increased at a slower pace of 5.3 per cent over the same period. A measure of wage increases that includes bonuses has edged down to 5.8 per cent from 6.1 per cent. Despite ongoing concerns about inflation, these figures suggest that wages remain elevated.

Labour market conditions have started to cool modestly. The number of job vacancies fell by 5,000 to reach 816,000, a level now comparable to pre-pandemic averages. Nonetheless, unemployment remained static at 4.4 per cent, indicating a degree of stability amid the economic uncertainty. Recent payroll data showed growth of 144,000 in February, surpassing earlier projections of 95,000.

Analysts at Deutsche Bank noted that while surveys suggest companies are reducing hiring, there is little visible evidence in the data to indicate widespread job losses. Wage growth, described as “stubbornly high,” remains a critical metric for the Bank of England as it works to bring inflation back towards its two per cent target.

Speculation remains regarding the impact of new economic policies, including an increase in the national living wage to £12.21 and a rise in employer payroll taxes from next month. These changes are anticipated to add pressure to employers, potentially leading to reduced hours, job cuts, or restrained demand for lower-skilled workers.

One bright spot is the ongoing decline in economic inactivity, which fell to 21.5 per cent. Government initiatives to bring people back into the workforce appear to be yielding results. This marks the third consecutive month of falling inactivity rates, contrasting with the record rise in inactivity seen in the wake of the pandemic.

Despite cautious optimism, economists expect wage growth to soften in the remainder of the year as hiring slows further. The National Institute for Economic and Social Research predicts earnings growth will ease to around 5.4 per cent by March, providing more clarity on how the labour market will adjust.