UK labour market continues to soften, but wages growth remains a problem

Further signs that the UK labour is slowly loosening were provided this morning, with the latest employment data showing the headline rate of unemployment rising from 4.3% to 4.4% in the three months to April, bringing it to its highest level since September 2021. The number of payrolled employees in May was also negative at -3k, although the large drop of -85k reported in April was revised down to -36k. On balance the figures will be welcomed by the Bank of England (BoE) as they at least show things moving in the right direction. But it will be perturbed by the slow progress being made in bringing wages growth down, which continues to grow at a pace incompatible with cutting interest rates.

Today's unexpected rise in the headline rate of unemployment (expectations were for the rate to remain unchanged at 4.3%) will be read by the BoE as further evidence that the monetary tightening it has delivered to date is having the desired effect in cooling what was an over-heated labour market. However, it is far too soon to suggest we are materially closer to an interest rate cut. Indeed, given the current unreliability of the employment figures, the BoE will be placing more weight on the CPI numbers when determining the appropriate level of interest rates: the volatility in the payrolled employees’ figures suggests today’s reported -3k fall will be revised upwards next month (last month’s figure was revised up by 49k today), while the accuracy of the reported headline unemployment rate continues to be beset by sampling problems.

But notwithstanding this, evidence is accumulating to suggest that the labour market is continuing to show signs of loosening – the uncertainty lays in the pace of this loosening. Redundancies are not showing signs of materially picking up, while survey data of late is suggesting that demand for labour may actually be picking up, as shown in, for example, the latest (May) REC Report on Jobs, which suggested the number of staff placements has risen marginally over the last two months after showing consistent declines since last July. On balance, therefore, the picture being painted is of a labour market that is easing, albeit only gradually.

The wages growth numbers, however, continue to present a problem. Weekly earnings (ex bonuses) remained steady at 6.0% on a 3mth/YoY basis, while average weekly earnings (AWE) remained steady at 5.9% from an upwardly revised March reading. On an annualised m/m basis, the AWE numbers rose by 8.1%, an increase on the 7.7% increase seen in March, while on a 3-mth annualised basis they rose by 6.8%, up from 5.2% in March and representing the strongest pace of growth seen since last August. Much of this increase may be a direct result of April’s 9.8% increase in the National Living Wage (NLW), which was also matched by many employers who pay a little above the NLW. Removing this uplift from today’s numbers lowers the AWE annualised April increase to just 4.8%. The BoE will want to be sure that this uplift is having no long-term impact on underlying wages growth before it will feel confident about cutting interest rates, particularly given its concerns over ‘sticky’ services inflation.

Overall, today’s numbers very much leave this month’s interest rate policy decision delivering another vote to keep rates on hold at 5.25%. The next Monetary Policy Committee (MPC) meeting takes place in August, although the MPC, regardless of the progress made with inflation, will probably want to see further evidence that wages growth is on a definitive path downwards before being confident enough to loosen policy. Accordingly, we still expect it will be at least September before any change in interest rates is delivered.