Annual wage growth in the UK remained at 3.4% in the quarter to May, its lowest level since 2020, while the unemployment rate stood at 4.9%, below expectations.
The UK labour market has stabilised at weak levels, according to official data released on Tuesday by the Office for National Statistics (ONS). The average wage growth, excluding bonuses, increased by 3.4% in the quarter ending in May, matching the pace of the previous period and reaching its lowest level since October 2020.
This increase coincided with the forecasts of economists surveyed by Reuters. According to analysts, it is unlikely that these figures will increase pressure on the Bank of England to raise interest rates. The unemployment rate stood at 4.9% in the quarter to May, slightly below the 5% expected by experts.
Youth unemployment reaches its highest level since 2014
One of the most striking figures is the rise in unemployment among young people aged 16 to 24, which increased to 16.4%, its highest level since 2014. This figure reflects the difficulties young people face in entering the labour market amid economic uncertainty.
Payroll employment barely registered changes in June, with a decrease of 4,000 workers on the payroll, according to data from the tax office. These figures are often subject to significant revisions; the initial increase of 2,000 people reported for May was revised upwards to approximately 3,000.
Small businesses cut hiring amid political uncertainty
Job vacancies in the quarter to June fell by 7,000, to 712,000, far from the peak of around 1.3 million reached in 2022. Liz McKeown, director of economic statistics at the ONS, explained that the decline was mainly due to smaller businesses reducing hiring. Employers have complained about the increase in their social security contributions, introduced by former Chancellor Rachel Reeves, which has raised labour costs.
Jack Kennedy, senior economist at the job platform Indeed, noted:
The overall picture is one of persistent hesitation on the part of employers. Companies continue to face cost pressures and operate in an uncertain environment, waiting for the economic direction under the new Prime Minister Andy Burnham to become clearer.
The new Prime Minister, Andy Burnham, took office on Monday after ousting Keir Starmer. His government has already announced measures to reduce household energy bills and plans to present a ten-year plan for the country by the end of the year. Investors are pricing in one or possibly two interest rate hikes of 0.25 percentage points by the end of 2026.
The Bank of England will hold rates while awaiting more data
The Bank of England, which is expected to keep interest rates at 3.75% next week, is closely monitoring whether the spike in energy prices caused by the conflict in Iran is translating into long-term inflationary pressures. Wage growth in the private sector, a key metric for the central bank, was the weakest since 2020, standing at 2.9% in the quarter to May.
Yael Selfin, chief economist at KPMG, stated:
Today's data reinforces the case for the Bank of England to maintain interest rates, given that labour market conditions remain weak and private sector wage growth continues to moderate. Private sector wage growth is now below levels consistent with the Bank's inflation target, providing further evidence that internal wage pressures are contained.
For British businesses, the stabilisation of the labour market is a relief, but political uncertainty and rising labour costs continue to weigh heavily. The coming months will be crucial to see if the new government can clear the economic horizon and reactivate hiring.
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