UK pay deals hold at 3% with employers in cautious mood, Brightmine says

British pay settlements held at 3% in the three months to August, though data indicates an increasing number of firms are offering smaller increases or freezes, contributing to a slight moderation in average weekly earnings growth to 4.8%. This cooling labor market dynamic is a key focus for the Bank of England, which maintained interest rates at 4% last week, as it navigates persistent consumer price inflation at 3.8% (expected to peak at 4% in September) and sluggish economic growth of 0.2%, with inflation projected to remain above target until 2027.

Analysis

The UK labor market is showing early signs of cooling despite headline pay settlements holding at a 3% median for the three months to August. This headline figure is undermined by a notable increase in pay freezes, which accounted for nearly 11% of settlements in the period, up from zero in the three months prior. This trend aligns with a slight moderation in average weekly earnings growth to 4.8% from 5.0% in the previous period. These developments are critical for the Bank of England (BoE), which held its interest rate at 4% while monitoring for signs of abating wage pressures. The central bank's cautious stance is set against a challenging macroeconomic backdrop characterized by stagflationary pressures: economic growth is nearly stagnant at 0.2% for the three months to July, while consumer price inflation remains elevated at 3.8% and is not expected to return to the 2% target until 2027. Further headwinds are anticipated from fiscal policy, with the government expected to announce tax hikes in November, potentially dampening economic activity further.

Key Decisions for Investors

• Given the combination of stagnant economic growth, persistent inflation above 3.8%, and forthcoming tax increases, investors should consider a cautious or underweight position on UK domestic-facing equities, particularly in consumer-sensitive sectors.
• Closely monitor upcoming UK labor market data, as further deceleration in wage growth or an increase in pay freezes could be a leading indicator for a dovish pivot by the Bank of England, influencing gilt yields and the Pound Sterling.
• The current environment of high interest rates and poor growth outlook presents a significant headwind for sterling-denominated assets long-term, even if the BoE's hawkish stance provides short-term support for the currency.