UK wage data has once again surprised to the upside, in an outturn that is likely to cause yet more concern amongst policymakers on Threadneedle Street. Having already been forced to reaccelerate their tightening cycle by a series of hotter than expected data that raised fears of an emergent wage-price spiral in the UK economy, today’s continued overshooting in wage growth will do little to assuage the concerns of BoE rate setters.
However, for the first time in some while, this release contains some signs of progress on labour market cooling. Notably, given upwards revisions to the April figures, today’s release was less alarming than perhaps the immediate headline numbers suggested. While the softening composition of the labour report suggests the BoE can take some comfort in the latest data, the fact that the data has continued to prove more resilient than the Bank has expected suggests they will continue to act in caution. For this reason, a second 50bp hike on August 8th isn’t off the table, but its likelihood is now dependent on how June’s inflation data prints on July 19th.
Wage growth shows signs of topping out
The metric of labour market strength that will capture the most headlines today will be average weekly earnings, which increased yet again to 6.9% on a 3m/YoY basis. Whilst still trending in the wrong direction, and marking a 0.1pp overshoot of pre-release expectations, it was notably only a 0.2pp increase of the April figure which was upwardly revised from 6.5% to 6.7%. Once adjusting for the effect of bonuses a similar pattern was also evident. Weekly earnings ex-bonus had been expected to tick down in this release from 7.2% to 7.1%. Granted, the print of 7.3% on this measure only managed to match last month’s upwardly revised figure, it still suggested that the rapid wage growth of recent months might now be behind us. This is visible in the more admittedly volatile monthly series, which saw pay growth ex-bonus drop from 7.7% to 7.1%.
Most critical for the Bank of England though, seems likely to be average regular pay growth for the private sector, which has been highlighted repeatedly by BoE speakers and took on a notable focus in the May Monetary Policy Report. On this score, the UK economy saw wage growth of 7.7% between March and May 2023 on an annualised basis, up marginally from 7.6% seen in the prior release. This will be the key point of concern for MPC members given the assumed passthrough of private sector wages to services inflation, with both having trended sharply in the wrong direction over recent releases. Doubly so, given that the BoE’s Decision Marker Panel Survey shows that businesses expect to increase wages by 5.3% over the next 12 months. But the single month change once again showed that private sector pay growth decelerated significantly from 8.1%YoY in April to 7.4% in May.
Therefore, today’s numbers do perhaps suggest that wage growth has peaked, but clearly the challenge of returning this to more sustainable levels remains a difficult challenge given embedded expectations and the current elevated growth rate.
Unemployment numbers surprise to the upside, pointing to a cooling job market
However, despite the continued climb in wages, unemployment figures are beginning to tell a different story about the state of the labour market. Having surprised markets in the April release by falling from 3.9% to 3.8%, unemployment numbers managed to surprise once again, this time in the other direction by increasing 0.2pp to 4.0%. Notably, this would place the unemployment rate just a quarter of a percent below the level that Bank staff have indicated is the neutral level for the UK economy, and 0.2pp above the level projected in the May MPR expected for Q2 2023. Progress was also seen on the vacancies measure, falling by 85,000 in the most percent release. Growing unemployment and falling vacancies numbers are a dynamic indicative of a cooling labour market, and should give some confidence to policymakers even in spite of hot wage data.
These dynamics take on an increased level of significance as they come just one day after the latest edition of the REC report on jobs was published, which similarly showed cooling levels of labour demand.
Given the REC report was for June, expectations were that today’s jobs data might have come too early to see this reflected in the hard data. But with forward looking measures pointing to cooling labour demand, and hard numbers beginning to agree, it seems likely that wages should follow suit over coming releases as wage pressures from a tight labour market start to ease.
The Beveridge curve shows that the UK labour conditions continue to retrace towards pre-Covid levels
In our view, there appears to be positive signs that the peak for wage growth may now be in on the back of today’s evidence, but this will probably not be entirely clear for at least one or two more releases.
Signs of labour market cooling should help provide comfort for policymakers that have appeared rattled recently, especially given the move to reaccelerate policy tightening at the most recent MPC meeting. For now the BoE appears to be remaining data dependent, a point highlight by Governor Bailey just yesterday saying: “the Monetary Policy Committee is monitoring developments – in particular, those in the labour market, in wage growth and in services price inflation – to assess whether pressures are proving more persistent”. In this sense, it seems likely that the upcoming CPI release on July 19th will be critical for the August policy decision. If today’s strength in headline wage numbers translates into hotter price growth then a 50bp hike in August seems the likely outcome. But signs that inflation, particularly on the services measure, are cooling, should give policymakers the confidence to slow the rate of hiking once again. For now markets seem to be marginally favouring the latter outcome, with expectations for a jumbo August hike and the peak in Bank Rate being trimmed modestly this morning to 79%. This has not, however, had the usual effect on sterling, as the currency is trading up against both the dollar and the euro on this morning’s news.
Once again the concern from markets around the risks posed by high Bank Rate on the UK economy, with today’s data providing a modicum of relief, both for BoE policy makers, and the pound.
Nick Rees, FX Market Analyst