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Unemployment to rise and wage growth to fall?

Journalist: John Choong (Head of Markets and Research), Newspage

ended 09. September 2024

With a September rate cut still looking unlikely despite encouraging third-party data last week, all eyes will be on tomorrow's labour market data as the most crucial piece of macro figures for the week ahead.

On the wage side, the Bank of England (BoE) estimates pay growth to have cooled further in July. Bank staff are projecting regular pay growth to drop lower to 4.9% from June’s 5.4%, while expecting total pay growth to decline to 4.2% from 4.5%. This would push wage growth closer to the sub-4% mark that’s in line with sustainable 2% headline inflation.

Flash estimates from last month’s labour data suggest a downward trend may continue. Median earnings growth is forecast to come in at 5.6% year-on-year. Although this is significantly higher than June’s 3.8%, it’s worth noting that June’s drop was due to  the lapping of one-time bonuses paid a year ago; July’s estimated print would still come in lower than May’s 6.0%. Median earnings are also seen to drop ever so slightly on a monthly basis, to £2,388 from £2,390.

There will also be a lot of attention paid to the unemployment rate, which the BoE anticipates to remain still at 4.2%. However, if July’s claimant count change data translates into higher unemployment (the highest since May 2020 at 566.9k), it could mark the highest rate in 3 years. That said, it’s worth stating that figures are always a month in advance of the unemployment data and are usually subject to large revisions.

Third-party data from KPMG and REC, however, does suggest further cooling in the labour market, as vacancies continued to fall for a 9th consecutive month while labour ability continued to rise. On the wage side, permanent staff salaries did continue to increase, albeit at a slower pace and was “below trend”, while temp staff salary inflation was at its lowest for nearly 3.5 years – in line with what the services PMI data had suggested as well.

Newspage asked analysts, economists, and experts for their views and predictions for the unemployment and wage data this Tuesday.

2 responses from the Newspage community

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Editor
Gabriel McKeown
Head of Macroeconomics at Sad Rabbit - Substack Newsletter
With inflation fears still simmering, the forthcoming UK labour market data could be the cold water that extinguishes the Bank's hawkish fire.

The latest projections paint a picture of a cooling labour market, as vacancies have fallen for 9 consecutive months, while the availability of workers has increased. This shift in the supply-demand balance has begun to exert downward pressure on wage inflation, suggesting a trajectory towards target. Consequently, Tuesday's labour data is critical for the BoE's monetary policy decisions.

A September cut seems unlikely, with the MPC wanting more evidence of sustained cooling in the labour market and a further moderation in wage growth. However, a higher-than-expected unemployment rate or a sharper wage growth decline could tilt the MPC towards a more dovish stance.
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John Choong
Head of Equities and Markets at Interpretiv
With claimant counts rising for three consecutive months we expect the unemployment rate to have climbed back up to at least 4.4%.

Concurrently, we anticipate wage growth to cool further, although not as much as the Bank’s estimates. August’s BoE Decision Maker Panel showed that year-ahead wage expectations continued to fall, which supports our thesis, while the latest Citi inflation expectations survey reported its sharpest fall to 2.6%, and has been a reliable leading indicator for the direction of wage growth.

This evolving labour market dynamic could, therefore, shift the odds of a September rate cut closer to 50/50 next week, or even more if the unemployment rate jumps to more than 4.5%. Nonetheless, it's crucial to temper expectations, as the definitive indicator will be the following week's services CPI print, which remains the linchpin in this rate cut equation.