UK reaction: Tentative signs things are moving in the right direction

The labour market data need to be taken with a pinch of salt, but the big picture is that conditions still appear to be easing. Starting with the Labour Force Survey data, employment fell by 140K in the three months to April, more than the consensus expected for a fall of 100K. Employment has fallen by 360k, around 1% of the workforce from its peak in April 2023. The workforce remained broadly unchanged pushing up the unemployment rate to 4.4% as a result.

These data, however, should be treated with caution, given the ongoing sampling issues. Other measures tell a slightly firmer story. Indeed, the PAYE measure of employee numbers was broadly unchanged in May, falling just 3K from April, and will probably be revised up in the second estimate. Note the payroll measure has risen by an average of 6K over the past 12 months between first and second estimates. And the chunky 86K fall between March and April is now a smaller 36K. Redundancies data don’t show a sharp pick up in jobs cuts either, falling to 98K in the three months to April, from 132K in the three months to January. Nonetheless, the PAYE measure has still taken a clear step down this year, with a monthly decline of 2.7K on average, compared to an average increase of 34.9K across 2023. And vacancy data show a further 12K decline in the three months to May, compared to the previous three months, leaving them 400K below their March 2023 peak. The vacancy to unemployment ratio is now broadly back to pre-COVID levels. Labour market slack, therefore, does appear to be increasing on these measures too.

The earnings data, meanwhile, also tentatively suggest things are moving in the right direction. While average weekly earnings excluding bonuses was unchanged at 6%, that was 10bp below expectations for a small rise to 6.1%.  In addition, the sector breakdown showed that earnings growth in low-paid sectors came in on the softer side – wholesale and retail pay growth, for instance, dropped to 5.7% from 6.2% – despite the near-10% National Living Wage hike in April. Private sector pay, ex. bonuses – a measure closely watched by the Bank of England – dropped to 5.8%, from 5.9%.

We think pay growth will start to slow materially over the coming months, now the impact of the NLW hike has passed through and labour market slack is edging higher. The PAYE measure of median pay dropped by 0.4% month-to-month in May, the sharpest May decline since the series began in July 2014 and well below the 2017-to-19 May average, 0.7%. In addition, respondents to May’s Bank of England Decision Maker Panel survey expect wage growth to average 4.1% in 12 months’ time, down from 4.6% in April and 5.1% at the turn of the year.

Today’s data will give those on the Monetary Policy Committee who are looking for a reason to cut Bank Rate this summer comfort that some progress is being made. Note too that by the August meeting – which we expect will mark the start of the easing cycle – the Committee will have a further labour market release, which should show a more material movement in wage growth. Overall, we remain comfortable with our forecast for a 25bp cut in August, with a further 25bp in November. We then expect a further cut in each quarter of 2025, leaving Bank Rate at 3.75% by end-2025.