Ritika Janiya
The UK job market has been cooling off, with wages now growing at a slower rate than before. According to new figures from the Office for National Statistics, this makes for a tricky decision by the Bank of England on cutting interest rates.
Wage Growth Slows
UK wage growth slows down to its weakest in two years in May. Annual pay growth came in at 5.7% in May, down from 5.9% in April, as reported in the previous month. This was aligned with city economists’ predictions. Though wages continued to rise, they were growing at a much slower rate than before.
Job Vacancies and Unemployment
The jobless rate—the number of unemployed as a share of the labor force—held steady in April at 4.4%, but the overall number of job openings decreased by 30,000. Most of that decline is in retail and hospitality sectors, which are hiring less.
We’re starting to see the first signs that the labour market may be cooling,” said Liz McKeown, a director at ONS. “The number of people on payroll is growing slowly, and unemployment is going up a bit. Wage growth is still strong, but it’s starting to slow down. Real wages, because of falling inflation, are actually the highest they have been in over two and a half years.”
More People Out of Work
Latest figures show there are now more than 500,000 extra people out of work compared with this time last year. This rise was driven by a higher number of people of working age not in employment and not looking for work. While the number of economically inactive people has fallen slightly in recent quarters, it remains high at nearly 9.4 million. One of the reasons ascribed to these people not holding any jobs is a factor of long-term sickness.
The new Work and Pensions Secretary, Liz Kendall, MP said: “The UK is the only G7 country whose employment rate hasn’t returned to pre-pandemic levels. This is appalling, and the government is determined to fix it.” It is real people that these figures represent, ignored and left without the help needed to get and hold onto a job. Change must be made.
What’s Next from the Bank of England?
Financial markets believe that the Bank of England will not lower interest rates from the current 5.25% when it meets on August 1. They want the reassurance that inflation will stay nearer to the government’s 2 percent target before they try to cut the cost of borrowing.
Q&A: The Bank of England has also cautioned that inflation may overshoot its target of 2% this year in view of the robust wage growth and significant price increases in the services sector. Inflation remained at 2% in June for a second successive month, latest figures show yesterday. The news made a rates cut by the Bank in August highly unlikely.
What Economists Say
But economists believe that 5.7% wage growth is too strong to be compatible with the Bank’s 2% inflation target. Ashley Webb, a UK economist at Capital Economics, said that while labor job market growth was slow, such growth may not be enough against strong inflation in services. “Because of this we think the first interest rate cut might be in September instead of August, but it’s a close call,” Webb said.
Global Perspectives
Some, like Huw Pill, the chief economist of the Bank of England, and members of its monetary policy committee, argued that service sector inflation and tightness in the labor market may make the Bank more cautious.
The European Central Bank was the first big global bank to trim borrowing costs last month. This week, Jerome Powell, chairman of the US Federal Reserve, hinted at cutting interest rates before US inflation hits the 2% target, increasing expectations for a September cut.
In other words, the UK’s job boom is losing steam, while wage growth is moderating. The Bank of England does have a real dilemma regarding interest rates, as it tries to quash inflationary pressures at a time when the jobs market is cooling. It’s going to be an action-packed fortnight for the economy.
