UK reaction: In the right direction

May’s labour market release will bring some comfort to the MPC, following June’s CPI data, with growing evidence of looser conditions and easing wage growth. While the unemployment rate held steady at 4.4%, that was still above the 4.3% forecast made by the MPC in May’s Monetary Policy Report. And employment still appears to have taken a leg down this year, with the LFS measure rising by just 19K in the three months to May 312K lower than in the same period in 2023. The ONS continues to stress the importance of taking the LFS data with a pinch of salt, given the ongoing sampling issues. But other measures also point to growing labour market slack. Indeed, the PAYE measure of employee numbers increased by just 16K – or 0.1% month-on-month – in June, well below the 2023 average monthly increase 35K. Vacancies also continued to ease, falling by 30K in the three months to June, leaving the vacancy to unemployment ratio broadly at its pre-COVID levels.

Wage growth also appears to be slowing more materially now that the near-10% increase in the National Living Wage has largely filtered through. Average weekly earnings, ex. bonuses fell to 5.7% in May – its lowest reading since September 2022 – from 6% in April. And perhaps more importantly the headline rate is being held up by public sector pay which held steady at 6.4%. Private sector regular earnings growth – which is the Bank of England’s preferred measure – by contrast fell to just under a two-year low of 5.6%, from 5.9%, having risen by 0.3% month-to-month, with broad-based slowdowns across the finance, construction and wholesale, retail, hotels and restaurants industries.

We think employment will continue to tick up over the rest of the year, given the strength of the recovery in broader activity. But strong immigration should boost the workforce in tandem, keeping the unemployment rate slowly edging higher to 4.5% by year-end. Private sector pay should therefore also continue to ease, dropping back to around 4% by year-end. Note that respondents to June’s Bank of England Decision Maker Panel survey expect wage growth to average 4.0% in 12 months’ time, down from 4.1% in May and 5.1% at the turn of the year.

Today’s labour market data has arguably increased the chances of the first cut being pushed through in August, after questions were raised following the release of June’s CPI inflation data yesterday. We continue to think it will be close, but the drop in private sector wage growth alongside signs that labour market slack is continuing to develop faster than the BoE forecast in May will give the doves a stronger footing to switch their vote. Bar any speeches from either Breeden or Bailey that strike a more hawkish tone, we think the MPC will vote to cut Bank Rate by 25bp in August, with a split of 5:4.