Deutsche Bank sees U.K. payroll drop as sign of increasing slack

Deutsche Bank analysts highlight a significant drop of 109,000 in May U.K. payroll figures, the largest decline since May 2020, and a cumulative seven-month decrease of 276,000 employees. Despite some positive indicators like the LFS employment increase and improved business sentiment, analysts believe the overarching trend indicates increased labor market slack and expect the unemployment rate to remain above the Bank of England’s equilibrium rate. Consequently, Deutsche Bank anticipates the MPC will ease its restrictive policy, projecting a series of rate cuts to bring the Bank Rate to 3.5% by year-end 2025 and further to 3.25% in Q1 2026.

Analysis

Deutsche Bank's assessment of the U.K. labor market reveals a significant downturn, evidenced by a 109,000 decline in May payroll figures—the most substantial fall since May 2020—and a cumulative loss of 276,000 payrolled employees over the past seven months. Private sector payrolls have seen an even larger reduction, exceeding 290,000. While these figures point to weakening conditions, Deutsche Bank acknowledges contrasting data points contributing to a "mixed" overall sentiment: the Labour Force Survey (LFS) indicated an 89,000 rise in employment for April, self-employment increased by 13,000 since year-end, and Workforce Jobs data showed employee and self-employed growth in Q1 2025. Furthermore, business sentiment indicators like the Lloyds Business Barometer and PMI data suggest improved future output expectations. Despite these partial offsets, Deutsche Bank concludes that the dominant trend is an increase in labor market slack, projecting the unemployment rate will surpass the Bank of England’s equilibrium rate for the upcoming year. This analysis, carrying a "dovish" tone and a high market impact score of 0.7, leads Deutsche Bank to anticipate the Monetary Policy Committee will ease its restrictive stance. They forecast a series of quarterly rate cuts through Q4 2025, with the Bank Rate expected to reach 3.5% by year-end 2025 and a terminal rate of 3.25% in Q1 2026, contingent on pay settlements aligning with the Bank’s inflation target.

Key Decisions for Investors

• Investors should consider positioning for a lower U.K. interest rate environment, given Deutsche Bank's forecast for Bank of England rate cuts extending into Q1 2026.
• Closely monitor upcoming U.K. employment data, particularly wage growth and unemployment figures, to validate the thesis of increasing labor market slack which underpins the anticipated monetary policy easing.
• Evaluate potential impacts on GBP currency pairs and U.K. gilt yields as the market continues to price in the projected policy shift towards lower rates.