UK pay growth slows but keeps beating inflation – business live

Introduction: UK wage growth slows, but beating inflation

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

UK wage growth has slowed, as the jobs market continues to cool, but continues to outpace inflation.

Average earnings (excluding bonuses) grew by 6.2% per year in the October-December quarter, new data from the Office for National Statistics this morning shows, down from 6.7% the month earlier.

Total pay growth (including bonuses), slowed to 5.8% from 6.7%.

Both readings are higher than the City expected.

A chart showing UK wage growth — Photograph: ONS

Much, but not all, of this wage growth is being eaten up by inflation, which ended 2023 at 4%.

If you strip out CPI inflation, then real total earnings rose by 1.6%, and regular pay grew by 1.9% – growth was last higher in July to September 2021.

That should help workers through the cost-of-living squeeze, but may disappoint the Bank of England which is looking for signs that inflationary pressures are easing.

Today’s jobs report also shows that the number of payrolled employees in the UK rose by 31,000 between November and December 2023, and rose by 401,000 over the year.

The unemployment rate has dropped to 3.8%, a rate last seen a year earlier in October to December 2022.

The employment rate rose to 75.0%, but the ONS warns that employment growth has slowed.

And the economic inactivity rate remains worryingly high at 21.9%, having been driven up last year by a rise in long-term sickness.

ONS director of economic statistics Liz McKeown says:

“It is clear that growth in employment has slowed over the past year. Over the same period the proportion of people neither working nor looking for work has risen, with historically high numbers of people saying they are long-term sick.

“Job vacancies fell again, for the nineteenth consecutive month. However, there are signs this trend may now be slowing.

“The number of days lost to strikes went up in December, with the majority coming from the health sector.

“In cash terms earnings are growing more slowly than in recent months, but in real terms they remain positive, thanks to falling inflation.”

The agenda

7am GMT: UK labour market report
10am GMT: ZEW index of eurozone economic sentiment index
1.30pm GMT: US inflation report for January

Key events

Full story: UK pay growth slows less than expected as workers bid up wages

Pay growth slowed less than expected in December as workers continued to bid up their wages amid skills shortages and a record number of people with long-term sickness, my colleague Phillip Inman writes.

The Office for National Statistics (ONS) said annual growth in regular earnings, excluding bonuses, was 6.2% in October to December 2023, while pay rises including bonuses was 5.8%.

City economists expected average earnings in the UK to drop significantly in the three months to December to 6% excluding bonuses and 5.6% including bonuses.

The modest fall will pose a dilemma for the Bank of England, which has signalled that pay rises need to moderate before it cuts interest rates.

After wages were adjusted for inflation, the ONS said workers enjoyed a fourth month of real wage increases. Total pay rose on the year by 1.6% above the consumer prices index and regular pay rose on the year by 1.9% in October to December 2023.

More here:

TUC: Conservative legacy is low pay, ill health and more insecure jobs

There was an increase in the number of people dropping out of the labour market because they were long-term sick in October-December, and also because they were students.

The number of those classed as economically inactive in the jobs market rose to 9.3 million in the final quarter of last year, with another jump in those off work due to long-term sickness, to a record 2.8 million, up 8.4% year on year.

The number of people economically inactive because they were looking after the family or home, or temporarily sick, fell – leaving the overall inactivity rate unchanged at 21.5%.

Photograph: ONS

TUC general secretary Paul Nowak says:

“These figures show how people’s lives are being held back by the government’s failure to invest in our NHS.

2.8 million people are out of work because of long-term sickness and the numbers are still rising.

“Average pay is still worth £12 a week less than before the financial crisis 16 years ago and more than a million people are on zero hours contracts. The Conservative legacy is low pay, ill health and more job insecurity.

“It’s time for change. We need a proper plan for jobs, growth and public services to get living standards rising sustainably again.”

Nomura: BoE will start cutting rates in August

Analysts at Nomura predict the Bank of England could resist cutting UK interest rates until this summer.

They say this morning’s labour market data was stronger than expected, adding:

Although BoE governor Bailey said that March was live for cuts, we think stronger- than-expected wage growth and a still tightening labour market support the Bank cutting only in August.

December wage growth was stronger than expected, with upward revisions to the November print. The unemployment rate declined, compared with forecasts for a rise.

We think the Bank of England will likely continue to wait for a bit longer before it begins its cutting cycle, owing to heightened uncertainty and volatility over labour market and inflation data, opting for a “delayed reaction function” as Ben Broadbent has previously indicated.

Pound hits six-month high against the euro

The pound has hit its highest level against the euro since last August.

Sterling is up 0.2% at €1.1745 this morning.

It’s a sign that traders think the Bank of England may be slower to cut interest rates than the European Central Bank, given UK wage growth is stronger than expected

A record number of people who are economically inactive due to ill-health mean that Britain remains the only G7 economy yet to return to pre-pandemic employment levels, says the Resolution Foundation.

More happily, “fast falling inflation” means that real wages are growing at their fastest rate outside the pandemic in nearly five years, they add.

Public sector pay growth lagged behind the private sector again.

The ONS says:

Annual average regular earnings growth for the public sector was 5.8% in October to December 2023, which is not as high as it has been in recent periods but remains relatively strong; for the private sector this was 6.2%, with growth last lower than this in May to July 2022 (6.0%).

Vacancy numbers fall

There are still over 900,000 vacancies across the UK economy, despite another drop in the number of job opportunities.

The ONS says the stimated number of vacancies in November-January fell by 26,000 to 932,000.

On an annual basis, there are 209,000 fewer vacancies than a year ago, although the total is still higher than before the Covid-19 pandemic:

Photograph: ONS

Alexandra Hall-Chen, Principal Policy Advisor for Employment at the Institute of Directors, says businesses are still struggling to access the labour and skills that they need to thrive:

“The increase in the economic inactivity rate over the past year, driven by historically high numbers of people reporting being long-term sick, is a particularly worrying sign of structural issues in the UK labour market.

Taken together with the government’s upcoming changes to legal migration rules, it is clear that urgent action is needed from government to increase domestic labour supply at the upcoming Spring Budget. Such measures should include delivering on the promised expansion to childcare provision and implementing measures to widen access to occupational health services.”

The UK labour market “continues to face challenges” as wage growth falls and long-term sickness remain historically high.

So says Ben Harrison, Director of the Work Foundation at Lancaster University, adding:

“For millions the cost of living crisis is not over, and yet the tide is continuing to turn on pay.

“Data shows there are now 2.8 million people who are economic inactive due to long-term sickness, which is at one of the highest levels since records began in 1993.

The recently revised ONS figures show that since before the pandemic, the UK now has just under 700,000 more working age adults out of the labour market due to work due ill health.

Chancellor of the Exchequer Jeremy Hunt has welcomed the news that real wages (earnings adjusted for inflation) have risen again, saying:

“It’s good news that real wages are on the up for the sixth month in a row and unemployment remains low, but the job isn’t done.

Our tax cuts are part of a plan to get people back to work so we can grow the economy – but we must stick with it.”

Pay growth slows: what the experts say

City experts believe the Bank of England will want to see a larger drop in pay growth before it feels confident it can cut interest rates.

Hugh Gimber, global market strategist at JP Morgan Asset Management, explains:

The recent trend lower in inflation, while good news, has largely been driven by a collapse in goods prices. The key watch item for the Bank lies in whether consumption reaccelerates as consumers find their feet. This would be good for growth but would also present upside risks to inflation, particularly in services sectors where prices tend to be more closely linked to wages.

As a result, with today’s print pointing to some signs of slowing in a still strong labour market, significantly more evidence of cooling is likely required before the Bank is ready to consider cutting rates.”

Jake Finney, economist at PwC UK, predicts that workers will see inflation-beating pay rises this year:

“The latest data suggests the UK has achieved its sweet spot, with declining vacancies taking the heat out of the labour market whilst unemployment remains relatively flat. This view is supported by the nominal pay growth data, which continues to soften.

“However, the lingering concern for the Bank of England will be that the labour market has not cooled sufficiently to achieve a sustainable return to the 2% inflation target. This remains one of the key barriers to the base rate cut in May that markets are currently expecting.

“More positively, workers will welcome that pay is now growing in real terms. With inflation declining at a faster pace than pay growth, workers are likely to see real term pay rises throughout most of 2024.”

Ashley Webb, UK economist at Capital Economics, says the slower-than-expected easing in wage growth may mean the Bank doesn’t need to rush to cut interest rates (but tomorrow’s inflation report will also be important):

While wage growth fell further in December, evidence that the labour market may not be loosening much suggests wage growth may not fall as fast as we expect.

Not too important if UK enters shallow recession, Bank of England’s Bailey says

Today’s jobs data comes in a busy week for economic news – with inflation statistics due tomorrow, followed by GDP on Thursday.

The growth figues may show that Britain fell into a technical recession at the end of 2023.

But last night, Bank of England governor Andrew Bailey said last night that he wasn’t overly concerned about a small drop in GDP in October-December.

Speaking after giving a lecture on banking at Loughborough University, he said he wouldn’t “put too much weight on that,” explaining:

“If we do get two successive negative quarters … it will be very shallow. What I would put more weight on is that the indicators we have seen since have shown some signs of upturn.”