UK pay growth slows as jobless rate rises to highest since 2021

UK pay growth slowed to 5.2% in the three months to April, the weakest since September, while unemployment rose to 4.6%, the highest since May 2021, increasing speculation of earlier and more aggressive rate cuts by the Bank of England. The slowdown in wage growth and rise in unemployment, coupled with a slump in payroll numbers, suggests easing labor market pressures, prompting market reactions including a drop in Sterling and gilt yields as investors priced in a greater chance of further rate cuts this year. The BoE, which is closely monitoring wage and price developments, may find this data supportive of rate cuts in August and November.

Analysis

The UK labour market exhibited significant cooling in the three months to April, as official data showed wage growth excluding bonuses slowed sharply to 5.2%, its weakest rate since September and down from 5.5% in the January-March period. Concurrently, the unemployment rate rose to 4.6%, its highest level since May 2021. These changes occurred after employers faced a £25 billion increase in social security contributions and a 6.7% rise in the minimum wage, both effective from April. The downturn appeared to intensify in May, with separate tax office data indicating a substantial 109,000 decrease in employees on company payrolls, the largest monthly fall since the COVID-19 pandemic's peak in May 2020. Furthermore, job vacancies fell by 63,000 in the three months to May, reaching 736,000, their lowest point since April 2021. Private sector earnings excluding bonuses also decelerated, rising by 5.1% in the three months to April, reported by the Office for National Statistics as the weakest pace since the third quarter of 2024. These indicators suggest easing inflationary pressures within the labour market, potentially making the Bank of England less cautious about implementing further interest rate cuts. Financial markets reacted swiftly: Sterling depreciated by three-quarters of a cent against the U.S. dollar, two-year gilt yields dropped to a two-week low, and interest rate futures adjusted to price in a greater probability of two additional Bank of England rate cuts this year. Economists, such as James Smith from ING, now see a stronger case for cuts in August and November. While the Bank of England is anticipated to maintain current interest rates at its upcoming meeting, this latest dataset strengthens arguments for subsequent reductions in borrowing costs.

Key Decisions for Investors

• Investors should increase their anticipation of Bank of England interest rate cuts in the latter half of the year, particularly around August and November, and consider adjusting fixed income portfolios to reflect the observed decline in gilt yields.
• Closely monitor movements in Sterling, as the currency has already weakened on this data and could face further downward pressure if expectations for monetary easing solidify; hedging currency exposure may be prudent for relevant portfolios.
• Re-evaluate exposure to UK domestic equities, paying attention to sectors sensitive to consumer demand, which may be negatively impacted by a cooling labor market, and those that could benefit from lower borrowing costs resulting from potential rate cuts.