UK’s Office for National Statistics (ONS) reported a record wage growth of 8.5% in May early Tuesday, September 12, leading to a rally in cable (GBP/USD). The record rise may have added to the Bank of England's (BOE) concerns and supported the view that interest rates will be raised from 5.25% to a peak of 5.50% when the bank meets next week, September 21. However, the spike in unemployment and a drop in vacancies saw the pair giving its gains back relatively quickly, as it suggested that the central bank may have to stop its interest rate hiking cycle in the final quarter of 2023.
The data signaled a cooling labor market over the last three months despite showing another month of strong pay growth. Analysts pointed to the potential for the BOE’s reluctance to keep tightening but suggested that a higher terminal rate is possible if data continues to outperform. The ONS will release the monthly GDP data for July on Wednesday, September 13, following recent upward revisions in post-pandemic GDP data for 2021 and 2022.
A Closer Look at the Data
Job vacancies fell below a million, with the unemployment rate rising to 4.3% in July, above the 4.2% in June. Regular pay finally rose at a rate matching inflation, meaning UK employees are seeing their wages increase in real terms. This is the first time real wages have increased in over 18 months, which puts more spending power into the hands of UK households.
Working days lost to strikes jumped during the month, especially in education. The increase in unemployment was largely driven by those unemployed for the long term, with the number of people unemployed due to long-term sickness reaching another record high. 21.1% of working-age people in the UK are economically inactive, up 0.1% in the month, even as the number of open jobs fell to the lowest level since the pandemic.
Other Influences on the Market
People re-entering the jobs market were taking longer to find work compared to prior in the year. The increase in average wages is used to calculate the increase in state pensions as part of the "triple lock" mechanism. With earnings, including pay increasing at 8.5%, that's expected to be the rate of increase for state pensions when calculated for next April, adding to pressure on the BOE. (Source:BBC)
Adding to unemployment, Wilko, a high-street retailer, announced on Monday it would close all of its over 400 stores, potentially leading to the loss of another 12,000 jobs after it failed to reach a rescue deal on Monday. The stores are expected to be shuttered by early October, with two big warehouses set to close by the end of the week.
Outlook for the BOE
The jobless rate is higher than the BOE predicted for the period. Chancellor Jeremy Hunt added that the high wage growth partly reflects one-off payments to public sector workers but insisted on fighting inflation. Last week, BOE Governor Andrew Bailey said that the end of rate hikes was "much nearer" but did caution that more increases to borrowing costs might be needed due to stubborn inflation. On Monday, Catherine Mann, who sits on the Monetary Policy Committee, warned that pausing rate hikes risks inflation becoming more embedded.
The central bank has been looking for evidence that the pace of pay increases has been slowing down, impacted by the higher cost of borrowing. The jobs and earnings data points were seen as the last vital piece of economic news before the BOE's rate-setting meeting, where it will have to balance a weaker jobs market against growing price pressures. Analysts see the BOE hawks being more emboldened than the doves, even as the latest employment figures show that interest rates are having some effect in slowing the economy. The UK economy is expected to contract on a monthly basis but expand slower on a 3-month basis.
UK GDP Could Shake Up Market
Recent revisions from the ONS showed that Britain's economy performed better than previously thought in its recovery from the pandemic and was ahead of other big European countries at the end of 2021. The ONS found that UK GDP grew by 8.7% through 2021, higher than the previous estimate of 7.6%, indicating a stronger recovery from the pandemic.
The revised figures change the international perception of the UK's economic recovery. Previously seen as a laggard compared to other advanced economies, the UK is no longer an outlier. If the upcoming GDP data shows another upward revision, it could be a good surprise to optimists.
Average wages, excluding bonuses, in the UK rose at a rate not seen in 22 years compared to the prior month, rising faster than inflation. Financial markets expect a hike of a quarter of a point in the interest rate meeting on September 21, where the BOE is set to decide whether another rate hike is necessary to cool demand in the economy.