Phillip Inman 

Pay growth in Great Britain falls below 5%, making interest rate cut more likely

Gap between wages and inflation narrows in August, as UK unemployment rate dips to 4%
  
  

Commuters on London Bridge
Vacancies fell back almost to the long-term average before the onset of the Covid-19 pandemic. Photograph: Victoria Jones/PA

The growth in employee annual earnings in Great Britain has fallen below 5% for the first time in more than two years, closing the gap between wages and inflation and increasing the likelihood of a further cut to interest rates.

Staff pay, excluding bonuses, rose by 4.9% in the three months to August compared with the same period a year earlier, down from 5.1% in the three months to July, according to the Office for National Statistics (ONS).

The ONS said annual growth in total earnings including bonuses was 3.8% in the three months to August, down from 4.1% for the equivalent period in July.

The fall is likely to be seen as a further milestone in the return to normal levels of earnings growth by the Bank of England and a spur to bring down interest rates at a faster pace.

However, the ONS said the data was volatile, and especially after a series of one-off bonuses awarded to NHS and civil service staff last year that had fallen out of the annual statistics, dragging down the figures for total earnings by more than would be expected.

In a sign of weakness in the labour market, the unemployment rate – which covers the whole of the UK – nudged down to 4% in the June to August period, while vacancies fell almost back to the long-term average experienced before the onset of the Covid-19 pandemic.

The last time annual pay growth fell below 5% was in June 2022, when the inflation rate had soared to 9.4% in response to rising energy and food prices. The consumer prices index has tracked downwards steadily over the past two years to hit 2% in May before a modest rise during the summer to 2.2% in August.

Policymakers at the Bank of England have cut interest rates only once in response to falling inflation – from 5.25% to 5% – arguing that the relatively high level of wages could spark a rebound in shop prices.

Pressure has mounted from business and consumer groups for further cuts after a slowdown in economic growth, which is expected to be flat in the third quarter of this year after an increase of more than 1% in the first half.

Tax rises in Rachel Reeves’s 30 October budget could also drag on economic growth, despite promises of a boost to spending on infrastructure over the rest of the parliament.

The chancellor has promised to close a £22bn spending gap she says was inherited from the previous Conservative administration. Reeves is expected to announce several tax rises to narrow the budget deficit, including a higher rate of capital gains tax and an increase in employers’ national insurance contributions.

Monica George Michail, an associate economist at the National Institute of Economic and Social Research, said the Bank of England was likely to view the stagnant economic situation and falling wages growth as a spur to cut rates further.

She said Threadneedle Street policymakers would be cheered by a “notable fall” in services sector pay growth, which fell to 3.6%, down from an average of 5.6% in the first half of this year. “This is positive news for inflation and might provide the Bank with increased confidence regarding interest rate cuts,” she added.

Earlier this month Bailey had suggested that the central bank could cut interest rates more aggressively if data showed the economy was slowing.

Jake Finney, an economist at PwC UK, said: “The softening in demand for labour is starting to weigh on wage growth. A quarter-point cut in November still seems most likely, given signs that wage growth is moderating and increasingly dovish commentary from Bank of England governor Andrew Bailey.”

The trades union body, the TUC, said the fall in the unemployment rate disguised a worsening situation for young people.

Youth unemployment rose to 12.8%, up 0.8 percentage points on the quarter. The number of young people in long-term unemployment has increased by 30,600 (or 53%) over the past year.

The TUC general secretary, Paul Nowak, said: “We know that youth unemployment has terrible scarring effects on young people’s life chances. This is not a problem we can allow to get any worse, and today’s rise in long-term youth unemployment is particularly concerning.”

An ONS review of the number of people of working age who are not in the labour market found that the rate of inactivity declined to 21.8% in the June to August period, down 0.3 percentage points from the previous three months.

The work and pensions secretary, Liz Kendall, said she was committed to doing more to help people back into jobs: “Millions of people are locked out of work due to long-term sickness. This is not good for them, for our economy or for the taxpayer.

“That’s why we will bring forward the biggest reforms to employment support in a generation – overhauling jobcentres, delivering a youth guarantee so every young person is learning or earning, and new work, health and skills plans to tackle inactivity – unlocking opportunity and potential in every area of the country.”


 

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