Pay grows at slowest rate in more than five years

The Office for National Statistics (ONS) reported that the unemployment rate held steady at 5.2%, a level that remains a near five-year high. While this figure suggests a degree of stability, it also points to underlying fragilities within the job market. Interestingly, the ONS also noted a modest rise in the number of workers on payrolls last month, a nuanced detail that requires careful interpretation. This could indicate a growing population or more people entering the workforce, even as the overall demand for labour struggles to keep pace, contributing to the elevated unemployment rate.

These comprehensive ONS figures emerge just ahead of a crucial decision on interest rates from the Bank of England’s Monetary Policy Committee (MPC). The prevailing expectation among economists and market analysts is that the MPC will opt to maintain the current cost of borrowing, keeping interest rates unchanged. This widely anticipated decision reflects a complex interplay of economic data and geopolitical developments.

Despite the recent slowdown in pay growth, wages are still outpacing the rate of price increases, offering a glimmer of positive news for household purchasing power. Inflation, as measured by the Consumer Price Index, fell to 3% in January. This meant that, in real terms (after accounting for inflation), workers saw a modest increase in their earnings. However, this positive real wage growth is now under threat. The sudden escalation of the US-Israeli conflict with Iran in the Middle East has sent ripples through global markets, leading many analysts to anticipate a resurgence in inflation in the coming months, primarily driven by rising energy and commodity prices.

Prior to the outbreak of the conflict in the Middle East, there had been considerable speculation that the Bank of England might consider cutting interest rates as early as Thursday. The argument for a cut was predicated on easing inflationary pressures and a potentially softening economy. However, the geopolitical tensions have fundamentally altered this outlook. The recent surge in the price of fuel and energy costs, directly attributable to the conflict, has effectively scuttled any immediate prospects of a rate reduction. Central banks typically shy away from cutting rates when external shocks threaten to reignite inflation, as such a move could exacerbate price pressures.

Yael Selfin, the chief economist at KPMG UK, underscored this shift in monetary policy priorities. She commented that a cut in interest rates on Thursday was highly improbable, stating, "Priorities have shifted, with MPC members set to turn their attention to the new upside risks to the inflation outlook." Selfin elaborated on the implications of this revised stance, warning, "This could see interest rates staying higher for longer, raising the prospect of a more pronounced loosening in the labour market over the coming months." Her assessment suggests that the Bank of England is likely to maintain a cautious, restrictive monetary policy stance for an extended period to combat potential inflationary spikes, which in turn could lead to a less competitive job market with fewer available positions and slower wage growth.

Liz McKeown, director of economic statistics at the ONS, provided a succinct summary of the current labour market conditions. "Labour market conditions were little changed at the start of the year," she observed. McKeown further clarified the payroll data, noting, "The number of workers on payroll rose slightly in the latest month but, overall, the recent picture has been broadly flat." This suggests that while there might be some incremental job creation, it’s not robust enough to significantly alter the overall trajectory of the labour market or bring down the unemployment rate substantially. The broadly flat picture indicates a period of consolidation rather than dynamic growth or decline.

The latest report from the ONS, though not fully detailed in the initial summary, typically provides a granular view of the labour market. Such reports often highlight:

• Sectoral Variations: Certain industries, such as technology or professional services, might still be experiencing modest wage growth, while others, like retail or hospitality, could be facing stagnation or even declines. Public sector pay trends are also a key component, often influenced by government policy rather than purely market forces.
• Regional Disparities: Wage growth and employment trends can vary significantly across different regions of the country, reflecting localized economic conditions, industry concentrations, and cost of living.
• Vacancies: The number of job vacancies is a crucial measure of labour demand. A decrease in vacancies often precedes a rise in unemployment, signaling employers’ reduced appetite for hiring. The current trend would likely show a continued easing in vacancy numbers from their post-pandemic highs.
• Economic Inactivity: This refers to the proportion of the working-age population who are neither in employment nor looking for work. Changes in this rate can indicate shifts in participation, perhaps due to long-term sickness, early retirement, or educational pursuits, all of which impact the overall labour supply.
• Average Weekly Earnings (AWE): Beyond the headline growth rate, the ONS provides detailed breakdowns of AWE, including total pay (with bonuses) and regular pay (excluding bonuses), and often by public and private sector, offering a more complete picture of earnings trends.

Despite the potential for the conflict in the Middle East to drive up inflation, KPMG’s Selfin expressed skepticism that this would translate into a surge in pay demands. Her reasoning hinges on the fundamental dynamics of supply and demand within the labour market. "Demand for labour is weak, which should curtail workers’ bargaining power and limit the scope for a pick-up in wage growth," she stated. This perspective suggests that even if the cost of living rises, employees may find themselves in a less advantageous position to demand higher wages due to an overall cooling of the job market and increased competition for available roles.

Ashley Webb, a UK economist at Capital Economics, offered a somewhat mixed, yet cautiously optimistic, interpretation of the recent payroll numbers. He suggested that the increase in February’s payroll figures might indicate that "the worst of the falls in employment due to the rise in labour costs in April 2025 are in the past." This could refer to anticipated impacts from future minimum wage increases or other regulatory changes that increase the cost of employing staff. While Webb acknowledged these "green shoots of a recovery," he tempered his assessment by adding that the latest figures also showed the labour market was "still weak" even before the recent escalation of the Middle East conflict. His forward-looking view remains pessimistic, as he concluded, "It will probably only get weaker as higher energy prices prompt firms to shed headcounts further." This grim forecast reinforces the idea that businesses, facing increased operational costs, may resort to reducing their workforce to maintain profitability, thereby exacerbating the softening of the labour market.

The broader economic context further complicates the outlook. The UK economy has grappled with persistent inflation, sluggish growth, and the lingering effects of global supply chain disruptions. While a technical recession was narrowly avoided in recent quarters, the fragility of the recovery remains a significant concern. Consumer spending, a vital engine of economic growth, is highly sensitive to real wage growth and interest rates. Higher borrowing costs make mortgages and loans more expensive, potentially dampening discretionary spending. Business investment, crucial for long-term productivity and job creation, can also be stifled by uncertainty and elevated interest rates. Government fiscal policy, including potential tax changes or spending plans outlined in upcoming budgets, will also play a role in shaping the economic environment.

In conclusion, the latest ONS data paints a picture of a decelerating labour market, with pay growth slowing to its lowest rate in over five years. While real wages are currently rising, this positive trend is under threat from renewed inflationary pressures stemming from geopolitical instability in the Middle East. The Bank of England finds itself in a challenging position, balancing the need to control inflation with the risks of stifling economic activity. Experts largely anticipate interest rates to remain elevated for longer, a stance that could further loosen the labour market and limit workers’ bargaining power. The path ahead appears fraught with uncertainty, demanding careful navigation from policymakers to support both economic stability and household prosperity.