91探花

The sharp slowdown in pay growth is further evidence that the labour market is normalising and that the disinflation process in Britain remains intact. With inflation set to fall below 2% in the upcoming CPI data, the Bank of England (BoE) remains on course to cut rates in November. 

Whether there is a sequential rate cut in December, will depend as much on what is announced in the Autumn Budget as the upcoming data. Recent comments from Governor Andrew Bailey mean the chances of two more rate cuts this year have risen substantially, but an expansionary budget may make the Monetary Policy Committee more cautious. 

UK labour market stabilising 

The unemployment rate ticked down in August to 4.0% from 4.1% on the back of a huge 373,000 increase in employment. However, the labour market data is still unreliable and looks erratic on a month-to-month basis, that massive jump in employment looks especially suspect, so it is better to look at the broader trends. The big picture is that the labour market is stabilising. Vacancies are trending down but employment now seems to be picking up a bit. 

There was some evidence in the unofficial data that pre-budget jitters impacted hiring in September. The number of employees on payrolls recorded a drop of 15,000 in September, from a 35,000 decline and vacancies maintained their downward trend, falling to 841,000 in the three months to September, down by 15,000 from the previous month. That compares with a peak of around 1.3m in mid-2022 and brings job openings a little closer to their 2016-19 average of about 800,000.

Pay growth slowing 

The message from the pay figures is clearly that things are easing. Regular private sector pay growth, the measure most closely watched by the BoE, dropped from 5.0% to 4.8% in August. The decline reflected a softer pace of underlying gains, suggesting any spillover effects from April’s near-10% increase in the National Living Wage remain broadly contained. 

Wage growth should continue to trend down over the rest of this year as 2% inflation is factored into pay settlements, although recent public sector pay settlements means that path will be bumpy. 

Just as importantly for households, real wages grew by 2.0%. That, combined with rising consumer confidence should give a boost to consumer spending in the second half of this year, helping a consumer spending driven recovery.

The policy outlook 

After delivering its first rate cut in August, the BoE reiterated at its September meeting it remained committed to a gradual approach to policy easing.

The fall in private sector wage growth is the latest evidence that the disinflation process in Britain remains intact. GDP data over the past few months has also reduced the risks of the economy overheating later in the year.

Together with another drop in inflation in the upcoming CPI print, that’s likely to give the BoE more confidence to cut rates again in November. Another cut in December will depend on how expansionary the budget is, but the chances are growing of two more rate cuts this year. 

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