For the first time in over two years, employee earnings growth in Great Britain has fallen below 5%, narrowing the gap between wages and inflation. This development increases the likelihood of further interest rate cuts by the Bank of England (BoE)
Slowing wage growth and economic signals
Data from the Office for National Statistics (ONS) shows that regular pay, excluding bonuses, grew by 4.9% in the three months to August compared to last year. This marks a slight decline from the 5.1% recorded in the three months to July. Total earnings growth, including bonuses, also dropped from 4.1% in July to 3.8% in August.
The slowdown in wage growth could mark a step towards returning to pre-pandemic earnings trends. This development may encourage the BoE to consider lowering interest rates to support the slowing economy. However, the ONS warned that the data is volatile, especially due to last year’s one-off bonuses for NHS and civil service staff, which skewed the figures.
Despite the drop in earnings growth, the unemployment rate across the UK fell slightly to 4% from June to August. Vacancies, however, have almost returned to pre-pandemic levels, indicating softness in the labour market.
The last time wage growth fell below 5% was in June 2022, when inflation peaked at 9.4% due to surging energy and food prices. Since then, inflation has decreased, reaching 2% in May this year. A modest rise in inflation over the summer saw it increase to 2.2% in August.
Interest rates and future economic pressures
Policymakers at the BoE have only cut interest rates once in response to falling inflation, reducing the rate from 5.25% to 5%. Concerns had been raised that high wage growth could lead to rising shop prices, preventing further rate cuts.
Business and consumer groups are now calling for more significant interest rate reductions, especially as economic growth slows. The economy is expected to flatline in the third quarter of this year, following a modest 1% rise in the first half of 2024.
Chancellor Rachel Reeves’s upcoming 30 October budget may add further pressure on economic growth. Tax increases are expected to cover a £22bn spending gap inherited from the previous Conservative Government. Among the anticipated tax changes are a higher rate of capital gains tax and increased national insurance contributions for employers. Although Reeves has promised to boost infrastructure spending, these tax rises may hamper growth.
Monica George Michail, an associate economist at the National Institute of Economic and Social Research, said that the BoE would likely see the current economic stagnation and falling wage growth as motivation for further rate cuts. A notable decrease in pay growth within the services sector, which dropped to 3.6% from an average of 5.6% earlier this year, is also a positive sign for inflation control.
Youth unemployment concerns
However, concerns remain about the labour market, particularly for young people. Youth unemployment has risen to 12.8%, and the number of young people facing long-term unemployment has surged by 53% over the past year. Meanwhile, the overall inactivity rate for working-age people dropped slightly to 21.8% between June and August.
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