In November, pay growth in the UK slowed more than anticipated, signaling a weaker response to inflationary pressures than initially forecasted by the Bank of England. According to the Office for National Statistics (ONS), average pay growth dropped to 6.5% from the previous month’s 7.2%, reflecting a weakening job market in the face of elevated interest rates and economic stagnation. Economists surveyed had expected total average earnings of 6.8% in November.
The ONS reported that job vacancies experienced the steepest decline on record in December, further indicating a cooling UK labor market. Despite the dip in wage growth, the recent decrease in inflation meant that real wages saw growth for the fifth consecutive month, providing some relief to household disposable incomes.
During the Covid-19 pandemic, vacancies had surged as older workers opted for early retirement, and younger individuals returned to education. However, the ONS noted that vacancies fell for the 18th consecutive month in the three months leading to December, declining by 49,000 to 934,000. Despite these challenges, the overall job market remained relatively stable, with only a marginal decrease in employment and an unchanged unemployment rate of 4.2%.
In response to the weaker-than-expected wage data, the pound fell, as traders increased bets that the Bank of England might consider interest rate cuts in the spring. Sterling was down 0.6% against the dollar at $1.2651.
As the Bank of England prepares to reassess its economic outlook next month, analysts anticipate the monetary policy committee to signal potential interest rate cuts this year. The acknowledgment of a weakening labor market and recent inflation declines are seen as indicators of further economic stagnation. Global shocks, particularly arising from conflicts in the Middle East, have also raised concerns among analysts about potential trade disruptions and a resurgence of shop prices.
The ONS figures revealed that workers in both the private and public sectors received comparable pay rises of 6.4% and 6.6%, respectively, in the three months to November. Notably, restaurants, hotels, and retailers in the private sector offered the most substantial pay increases at 7.2% on average, while construction workers experienced the smallest rise at 4.5%, reflecting challenges within the building industry.
Chancellor Jeremy Hunt welcomed the news of real wage growth amid falling inflation, highlighting the positive impact on household finances. Additionally, he mentioned the record cut to national insurance, providing additional income to households.
Chancellor Jeremy Hunt expressed optimism about the economic landscape, emphasizing the positive aspect of real wage growth coupled with falling inflation. He pointed to the record cut in national insurance, asserting that it has contributed to putting more money in the pockets of households.
However, concerns about the broader economic outlook persist. The Bank of England, scheduled to re-examine its economic forecasts next month, is under scrutiny as analysts anticipate signals for potential interest rate cuts. The weakening labor market and recent declines in inflation are seen as indicators of a challenging economic environment.
While gross domestic product (GDP) expanded slightly in November, a 0.3% month-on-month increase failed to prevent a 0.2% drop over a three-month period. Analysts are wary of potential global shocks, especially arising from conflicts in the Middle East, which could impact trade and contribute to a resurgence in shop prices.
The private and public sectors both experienced comparable levels of pay rise, with increases of 6.4% and 6.6%, respectively, in the three months leading to November. Notably, sectors such as restaurants, hotels, and retailers in the private sector provided more significant pay raises at 7.2% on average, while construction workers, reflecting the challenges in the building industry, saw the smallest rise at 4.5%.
As the UK navigates through economic uncertainties, including the impact of geopolitical events, the government’s ability to manage inflation, employment, and wage growth will be crucial. The upcoming decisions by the Bank of England and the ongoing economic challenges will shape the trajectory of policies aimed at sustaining economic stability and supporting households in the face of global and domestic headwinds.