UK wage growth slowed last month while demand for workers remained flat, paving the way for further interest rate cuts by the Bank of England.
Research from KPMG and the Recruitment and Employment Confederation (REC) reveals that the rate of pay growth for both permanent and part-time employees slowed in July. The permanent pay index fell to 56.5 from 57.1 in June, remaining above the 50 mark that indicates growth. The temporary pay index also fell, falling to 50.9 from 53.7.
The figures, which are being closely watched by the Bank of England because of concerns about the accuracy of official labour market estimates, suggest that wage growth is slowing from record highs. This trend is partly due to the impact of tight monetary policy on economic demand. Strong wage growth over the past two years has helped to mitigate the impact of the cost of living crisis on workers’ real incomes.
Employment also contracted in July, with the KPMG/REC permanent employment index coming in at 47.7, indicating that firms were hiring fewer full-time staff. However, the slowdown in hiring was less severe than the previous month. The vacancy index rose slightly to 49.1 from 48.6, while the temporary employment index fell to 49.8 from 50.3.
Kate Shoesmith, deputy chief executive of the REC, commented: “The weaker growth in both salaries and temporary wages suggests that employers are linking wages to inflation as the Bank of England would like. Lower interest rates are a welcome move, and employers will need continued support to maintain confidence.”
This month, the Bank of England cut its base rate by 0.25 percentage points to 5%. The Monetary Policy Committee said it was now looking at overall economic data rather than specific indicators. Financial markets are expecting two more quarter-point cuts this year.
The central bank has expressed concerns about the challenges in assessing labour market trends due to the deteriorating quality of data from the National Statistics Office. Low response rates to the ONS’s Labour Force Survey have raised doubts about its reliability. As a result, the bank now relies on alternative research, including the KPMG and REC jobs report.
Analysts expect the UK economy to gain momentum later this year, which could prompt companies to ramp up hiring to meet rising demand. The Bank of England recently revised its 2024 GDP growth forecast up to 1.25 percent from 0.5 percent.
In its annual review, the Office for National Statistics raised its estimate for the UK’s post-Covid economic recovery. The economy is expected to grow by 4.8% in 2022, up from an initial estimate of 4.3%. The contraction in GDP in 2020 has been revised down to 10.3%, less severe than previously thought.
By the end of 2022, the economy was 2.1% larger than its pre-Covid-19 size, an improvement on the ONS’s previous estimate of 1.9%. The UK’s recovery was initially seen as the slowest among G7 nations, but revised data shows it was close to the group average.
“With the outlook for economic growth improving and interest rates set to come down in the coming months, there are signs of an economic recovery,” said John Holt, CEO and senior partner at KPMG in the UK. He added that some businesses may hold off on hiring until after Chancellor Rachel Reeves delivers her first budget on October 30, seeking more clarity on fiscal policy. The chancellor has indicated that tax increases are looming.