UK wage growth hits two-year low

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Official data released on Tuesday showed unemployment unexpectedly fell while wage growth in Britain slowed to its lowest level in nearly two years in the three months to June.

According to the National Bureau of Statistics, annual earnings growth excluding bonuses slowed to 5.4% in the three months before the revision in May from 5.8%.

That was in line with forecasts from economists polled by Reuters and marked the lowest level since July 2022.

Ruth Gregory, an economist at consultancy Capital Economics, said further moderation in wages growth would be welcomed by the Bank of England as a sign that labour market conditions were continuing to cool.

This supports our forecast that the Bank of England will cut rates by two more 0.001 percentage points later this year, she added.

The Office for National Statistics also reported that the UK unemployment rate fell from 4.4% in the three months to May to 4.2% in the three months to June. Economists had forecast it would rise to 4.5%.

Figures suggesting a more active labor market are at odds with cooling wage growth data.

But analysts have pointed out that the unemployment data is unreliable because of the low response rate to the survey from which it is derived, which is separate from the one used for the wage data.

Gregory said: Given the problems with the labor force survey, it's hard to know how much weight to put on this number. Probably not too much.

Rob Wood, an economist at consultancy Pantheon Macroeconomics, added that the BoE's monetary policy committee would likely place relatively little weight on employment data.

But he said recent signs that economic growth was picking up and that wage payrolls had increased by 24,000 jobs in early July suggested the labor market may not be slowing down.

He said he thought the BoE was likely to cut borrowing costs at its September meeting, and that with overall jobs growth looking strong, rate-setters would have a hard time justifying further rate cuts. He expects the MPC to wait until November to cut the bank rate again.

The pound rose after the data was released, rising 0.23% against the dollar to trade at $1.28.

Investors slightly lowered their rate outlook, still pricing in the possibility of a rate cut in November, but said a second cut in December was unlikely.

Monetary Policy Committee members closely monitor domestic price pressures and wage growth, a key indicator of inflation.

The Bank of England focused particularly on private sector wages growth, predicting that private sector wages growth would slow to 5.1% in the three months to June.

ONS data was broadly consistent with these expectations, with private sector average annual regular earnings growth slowing to 5.2% in the April-June 2024 period, the slowest pace in more than two years.

The BoE cut rates by 0.25 percentage points to 5% on August 1, its first cut since the pandemic began, but investors expect it to keep its benchmark rate unchanged in September.

The latest figures come ahead of UK inflation data for July due on Wednesday, which show that falling household energy bills are expected to push price growth back above the BoE's 2% target of 2.3%.

Annual pay growth, including bonuses, slowed from 5.7% to 4.5% over the same period, partly because a one-off payment made to NHS staff in June 2023 was not repeated this year.

The ONS also reported that the employment rate, based on the Labour Market Survey, was broadly unchanged in the quarter at 74.5%, down 1.7 percentage points from the pre-pandemic level.

Finance Minister Rachel Reeves said: Today’s figures show there is more work to be done to support people into work, because everyone who can work should do so.

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