The downturn in the UK’s jobs market appears to be gathering pace, but the chancellor, Rachel Reeves, will hope that means slower wage growth will open the way to more interest rate cuts.
Unemployment has continued to rise, the Office for National Statistics (ONS) said, ticking up to 4.6% in the three months to April, from 4.5% in the three months to March.
Vacancies declined in the three months to May, the 35th successive fall – with some evidence that the downturn is accelerating, as rising employment costs, including the higher minimum wage and Reeves’s £25bn employer national insurance increase, start to bite.
The ONS said the 63,000 fall in vacancies was the sharpest since mid-2023, reflecting survey evidence that “some firms may not be recruiting new workers or replacing workers who have left”.
Payrolled employment – a more timely estimate, but one the ONS suggests treating with caution – declined by 109,000, or 0.4%, in May.
The governor of the Bank of England, Andrew Bailey, has made clear that he sees the labour market – and specifically wage growth – as the key determinant of whether interest rates can come down, from their elevated level of 4.25%.
Speaking to MPs on the cross-party Treasury select committee last week, Bailey said the question of whether pay settlements would decline through this year was, “a crucial judgment going forward”.
One dovish member of the Bank’s nine-member monetary policy committee (MPC), Swati Dhingra, suggested she feared keeping rates high for such an extended period was damaging the economy.
Bailey is likely to have been modestly reassured, then, to see wage growth slipping in the three months to April, to 5.2% for regular pay, down from 5.5% in the three months to March.
The MPC acknowledges that interest rates are squeezing economic growth – but are nervous about cutting further until they are confident lower rates won’t unleash a fresh surge of inflation.
Thomas Pugh, an economist at the consultancy RSM UK, suggested the Bank is likely to continue to hold off, for now: “a rising unemployment rate, another slump in payroll numbers, fewer vacancies and slowing wage growth paints a pretty clear picture of a rapidly cooling labour market. However, with private sector pay growth still running at almost double the rate the MPC is comfortable with, further policy easing will be gradual.”
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Along with many analysts, he believes a rate cut could come in August – continuing with the Bank’s pace of quarterly reductions.
In her speech in Rochdale last week, highlighting £15bn planned investment in buses, trams and other transport links, Reeves claimed the credit for the four rate cuts the Bank has already made since she arrived in No 11, arguing her strict fiscal rules had helped.
“It is the stability that my rules supports, and the choices we made as a government in October, that have helped facilitate four cuts to interest rates since the last election – saving £650 a year for a family taking out a new, typical two-year fixed-rate mortgage,” she told bored-looking bus workers.
The Treasury knows that lower rates are a key determinant of the cost of living, as well as feeding through to yields on government bonds.
Reeves will be hoping wage growth continues to cool off enough to persuade Bailey and his colleagues to cut again – most likely in August – but the Treasury will also be watching nervously, in case the downturn in the jobs market accelerates.