British wage growth slowed to its lowest level in two years in May due to a weakening jobs market, highlighting the challenges for the Bank of England as policymakers consider whether to cut interest rates.
The numbers are UK Office for National Statistics The ONS said annual wage growth slowed to 5.7 percent in the three months to May from 5.9 percent in the three months to April, in line with forecasts by City economists.
The unemployment rate remained unchanged from 4.4% in April, and the number of job openings fell by 30,000 as demand in retail and hospitality jobs weakened as hiring continues to slow across the economy.
After a sharp fall in headline inflation in recent months, real wage growth, which takes into account rising living costs, has strengthened. Total real wages, including bonuses, rose 3% year-on-year in the three months to May. The most recent fastest increase was 4.5% in the three months to August 2021.
Liz McKeown, head of economics and statistics at the ONS, said: “Employment growth is weakening over the medium term, the unemployment rate is gradually rising and overall there continue to be signs of a cooling labour market.”
“Cash earnings growth has remained relatively strong but is showing signs of slowing again. Inflation, however, is declining and is at a two-and-a-half-year high in real terms.”
In a sign of the cooling labor market, the latest figures showed that the number of unemployed has increased by more than 500,000 since this time last year due to increased economic inactivity – working-age adults who are neither in work nor looking for work.
The economic downturn has slowed in recent months but remains near record highs at about 9.4 million, with almost a third out of the labor force as long-term illnesses remain near record levels.
The new Work and Pensions Secretary, Liz Kendall, said the UK was the only G7 country whose employment rate had not returned to pre-pandemic levels. “This is a truly tragic legacy and one the government is determined to tackle,” Ms Kendall said.
“Behind these statistics are real people who for too long have been ignored and denied the support they need to get and succeed in work. It’s time for change.”
Financial markets are expecting bank policymakers to refrain from cutting interest rates from their current level of 5.25% when they meet on Aug. 1 and to wait to cut borrowing costs until they are confident inflation will remain close to the government’s 2% target.
Threadneedle Street has previously warned that inflation is likely to exceed 2% this year due to strong wage growth and rising prices in the services sector of the economy.
The figure comes after headline inflation unexpectedly stayed at 2% for a second consecutive month in June, with underlying indicators for the services sector also remaining stable, likely dashing hopes of a rate cut in August.
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While wage growth has slowed, economists say the 5.7% increase is still out of line with the Bank of England’s 2% inflation target. Ashley Webb, a British economist at consulting firm Capital Economics, said the slowdown in the labor market probably isn’t enough to offset the strength of services inflation.
“As a result, we have revised our forecast for the first rate cut to September from 5.25% in August, but the situation remains delicate,” he said.
Several members of the bank’s monetary policy committee, including chief economist Hugh Pill, warned last week that service sector inflation and a tight labor market could force the bank to tread cautiously.
The European Central Bank last month became the first major global central bank to cut its official borrowing costs, and on Thursday it kept rates unchanged.
Federal Reserve Chairman Jerome Powell signaled this week that he is willing to cut interest rates without necessarily waiting until U.S. inflation falls to the central bank’s 2% target, raising hopes of a rate cut in September.
