UK Wage Growth Slows: Official data indicates the biggest drop in UK wage growth in nearly two years. While data show a reduction in labor market inflation, annual wages, excluding bonuses, rose 7.3% in the three months to October, down from 7.8% in September. The Office for National Statistics reported the largest drop since November 2021. Darren Morgan, the director of economic statistics at the ONS, notes, “While annual growth in earnings remains high in cash terms, there are some signs that wage pressure might be easing overall.”
Despite the UK’s stagnating economy and the looming risk of a shallow recession, many employers are grappling with labor shortages. The contraction of the British workforce during the pandemic, coupled with post-Brexit restrictions on EU workers, contributes to the challenges in filling vacancies. Martin Beck, chief economic advisor to forecasters EY ITEM Club, observes, “The pay data is clearly now moving in the right direction from the perspective of the Monetary Policy Committee.”
However, the Bank of England (BoE) remains cautious, emphasizing that annual pay growth, more than twice the pace consistent with the 2% inflation target, warrants a ‘high-for-longer’ message. Analysts, including JP Morgan economist Allan Monks, suggest that if the trend of slower wage growth persists, the BoE might consider a more neutral policy stance in early 2024.
Sterling fell against the U.S. dollar and British government bond yields plummeted after the ONS report. After 14 rate hikes between December 2021 and August 2023, the BoE is projected to retain the status quo in December. The deceleration in regular pay growth signifies a further drop from the summer peak of 7.9%, the highest recorded since the ONS began collecting data in 2001. Including bonuses, pay growth slowed to 7.2% from 8.0% in the three months to September.
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The BoE expresses concern that robust pay growth, particularly in the private sector, hampers efforts to bring inflation down to the 2% target. While the broader economy faces stagnation, inflation in Britain, currently at 4.6%, remains more than double the BoE’s target, necessitating heightened vigilance. Despite a 17th consecutive decline in vacancies in the three months to November, down nearly 30% from the peak, they still surpass pre-pandemic levels. Finance minister Jeremy Hunt’s recent changes to the welfare system aim to boost employment.
Tuesday’s data indicates that the UK’s unemployment rate held steady at 4.2% in the three months to September, with employment rising by 50,000 people. However, the ONS cautions that these figures may not prove reliable due to changes in measuring the jobs market.
Despite the slowdown in headline pay growth, workers experienced the most substantial increase in their incomes, adjusting for consumer price inflation since the three months to September 2021, with a rise of 1.2% on an annual basis. The evolving economic landscape keeps stakeholders, analysts, and policymakers watchful for further developments in the UK labor market.