British wages increased at their slowest rate in nearly two years, potentially easing concerns at the Bank of England about inflationary pressures, while unemployment unexpectedly declined, according to official data released on Tuesday.
Average weekly earnings, excluding bonuses, rose by 5.4% in the three months to June compared to the same period a year earlier, down from 5.8% in the preceding three months and marking the lowest growth since August 2022, the Office for National Statistics (ONS) reported. Meanwhile, the unemployment rate dropped from 4.4% to 4.2%, its lowest level since February, contrary to economists' expectations of a rise, as indicated by a Reuters poll.
The pound strengthened against the U.S. dollar following the release of these figures. The Bank of England, which reduced interest rates to 5.25% on August 1 after maintaining them at a 16-year high for nearly a year, has indicated ongoing vigilance over wage trends. Market observers currently estimate a one-in-three likelihood of another rate cut by the Bank in September.
Despite the slowdown, pay growth remains nearly double the rate considered sustainable by the Bank of England for achieving its 2% inflation target. Upcoming data on Wednesday is expected to reveal inflation returning to above-target levels.
Sanjay Raja, chief UK economist at Deutsche Bank, commented that the current data suggests a cautious easing of restrictive policies. However, sustained GDP growth could potentially lead to a stronger labor market recovery, potentially resulting in a less aggressive rate-cutting cycle.
The number of employed individuals increased by 97,000, significantly exceeding the 3,000 increase predicted by economists. Raja also noted that the lower unemployment rate might be partially attributed to past overstatements of joblessness by the ONS, which has seen improved response rates to its labor force survey since the beginning of the year.
Employers anticipate that lower headline inflation will lessen wage pressures. The Chartered Institute of Personnel and Development reported on Monday that pay raises are expected to be 3%, the lowest in two years. Meanwhile, Britain's new finance minister, Rachel Reeves, has approved minimum pay increases of 5% for millions of public sector workers.
The Bank of England is particularly focused on private sector pay, forecasting a slowdown to 5% by late 2024 and 3% by late 2025. Private sector regular pay growth slowed to 5.2% in the three months to June, the lowest since May 2022, from 5.6% in the previous three months. Adjusted for inflation, real pay excluding bonuses has risen by 3.2% annually, marking the joint-biggest increase since mid-2021.
Growth in average earnings including bonuses and other one-off payments fell to 4.5%, the lowest since late 2021, reflecting adjustments for backdated payments to public health workers from a year earlier. Public sector regular pay growth also declined to a five-month low of 6.0% from 6.4%.
The Bank of England continues to monitor other inflationary pressures, such as labor shortages exacerbated by the Covid-19 pandemic. Job vacancies fell to a three-year low of 884,000 in the three months to July, down from 1.3 million in mid-2022 but still elevated compared to early 2020 levels.
Jack Kennedy, senior economist at hiring platform Indeed, highlighted that filling vacancies remains challenging in several sectors, with near-record working age inactivity at 9.4 million being a significant factor. The percentage of working-age individuals neither employed nor unemployed due to various factors edged up to 22.2% in the three months to June, close to an eight-year high.
The new government aims to boost labor force participation to 80%, a level achieved by smaller economies like the Netherlands, Switzerland, and New Zealand. Finance Minister Reeves emphasized the importance of increasing employment, indicating that this will be a key focus in her upcoming budget, set for September 30.
