UK reaction: Wage growth hot, but broadly in line with MPC expectations

The latest labour market data are somewhat of a mixed bag, with further evidence that slack is developing contrasted with stubbornly high wage growth. The LFS measure of employment dropped by 177K in Q1, driven largely by a reduction in part-time workers and the self-employed. The workforce also contracted due to a further increase in the number off work due to temporary and long-term illnesses, but it fell by a smaller 11K; the unemployment rate, therefore, ticked up to 4.3%, its highest level since the three months to July last year. Meanwhile, the PAYE measure of employee numbers dropped by a chunky 85K on the month in April, the largest decline since November 2020.

We continue to take these data with a large pinch of salt, given the ongoing sampling issues in the LFS survey and the upward revision to the PAYE measure of employment in March – it was revised up from a 67K fall to a 5K fall. But other measures of slack have continued to improve; vacancies, for instance, fell to 898K in the three months to April, from 913K in the three months to March, while survey measures of staff availability – including the REC/KPMG staff availability balance – have continued to increase. And despite the issues with data, it’s clear employment has taken a step down in 2024; the PAYE measure of employment, for instance, rose by an average of 35K a month last year, compared to a rise of just 2K a month in the first quarter.

Wage growth, however, remains high. The headline rate of whole economy pay was unchanged at an upwardly revised 5.7% and the ex-bonus measure stayed at 6%, with hefty gains in pretty much every sector except construction. And the ex-bonus measure of private sector AWE was up 5.9% on a three-month average year-over-year pace, compared to February’s, 6%. The March data also showed clearer signs that the near-10% increase in the NLW is behind the recent strength with retail and hospitality pay up 1.2% on the month. With only a few low-pay employers pushing through pay increases in March, the momentum in pay is unlikely to abate in the next few months. But with slack developing, we think pay growth will drop back to around 4% by the end of the year.

The big question is where does this leave the MPC? While hot, today’s figures on pay came in broadly in line the upwardly revised forecasts laid out by the Bank in their May Monetary Policy Report. Indeed, the Committee expected private sector regular pay to stay at 6%. If wage growth continues to come in as expected – we get another round of labour market data on June 11 – and inflation data also play ball, we continue to expect the first cut in June. But the ongoing strength means we expect the MPC to then wait until September to continue cutting. The market reacted only modestly, with sterling at $1.2546, from $1.2557.