The UK still looks set to get another interest rate cut (or two) by the end of the year, but is that now the main indicator of a healthy labour market? This morning’s update from the Office for National Statistics shows average wage growth slowed to 4 per cent in the three months leading up to July. Wage growth is still outpacing inflation, but it is moving in the right direction – for the Bank of England anyway, which is watching closely to see if its first rate cut is going to have any major impact on wages, risking a secondary round of inflation spikes.
Adjusting for inflation, overall wages are up 1.1 per cent on the year, which should give the BoE room for another rate cut this autumn and even possibly at its last meeting in December. The FTSE 100 slumped slightly this morning, as the markets believe the Bank is moving further away from a rate cut in September. But it has long been assumed that the Bank would take the more cautious approach and wait at least one meeting between its first rate cut and its second, regardless of wage and inflation data.
But with the focus on wage data for so long, is this really the best indicator now for identifying the oddities in the labour market? This morning’s ONS report contains a range of mixed signals. In some ways, the labour market appears to be continuing to cool, both with wage growth slowing and with job vacancies down yet again (now just 5 per cent above their pre-pandemic levels). Employment and unemployment figures only shifted slightly: the latter dropping from 4.2 per cent to 4.1 per cent in the three months to July.
But economic inactivity remains a serious issue, as youth unemployment hits 13.3 per cent. This is its highest level in three years and a 1.4 percentage point increase in the last three months. It’s a similar story for the number of people out of work due to long-term sickness. While the latest update suggests the total number has come down slightly, it still sits at a near-record high of 2.79 million
This suggests something more worrying going on in the labour market, as job vacancies and the unemployment rate both fall, while the number of people out of work (or on some kind of out-of-work benefit, the number of which now sits at 5.8 million) continues to remain sky-high. Just at the time the UK needs incentive and recruitment tactics to help assist people back into work, it seems businesses are getting cold feet about hiring. The latest data from the Recruitment and Employment Confederation, released yesterday, shows the ‘permanent placings index’ fell in July, from 47.7 to 44.6, indicating further reduction in the hiring field.
While some of these hesitations will be driven by external economic factors, there is no separating the new government’s language around the economy – and its floated plans for employment regulation – from what increasingly appears to be a shift in hiring attitudes. This week the Institute of Directors reveals its latest survey, showing the majority of businesses are likely to hire fewer workers if the Labour government goes ahead with its plans to grant employment rights from day one. Meanwhile there is growing concern that Labour’s description of the UK economy right now – on its knees, barely staying afloat, one winter fuel allowance payment away from an economic crash – is doing very little to inspire the business confidence needed to invest and expand in UK companies.
While all eyes remain in Rachel Reeves’s first Budget in October, it’s clear that even the whispers of changes and floated plans are having an impact on business confidence. It could not be happening at a more difficult time: if Labour are going to balance out their long list of new regulations with some kind of growth agenda, they’re going to need to get more people into work. It may become clear, quite quickly, that the former makes the latter a near-impossible task.