Pay growth in the private sector in the UK is slowing to its lowest level since the beginning of the Covid-19 pandemic. With the economy in such a perilous state, this slump comes as an immediate challenge to new Prime Minister Andy Burnham who has been sworn in with the public purse stretched and an economy that is at a critical stage.
Wages in the private sector increased only 2.9% in the three months to May, according to the latest figures from the Office for National Statistics (ONS). The six-year low comes on the heels of the first fall below the 3% level since October 2020.
The majority of employees saw only small increases in real wages as a result of the high level of inflation (2.8%) during the same time. Earnings declined even more strongly in finance and business services (2.3%) and manufacturing (2.5%), and fell even though earnings in construction actually fell by 0.2%.
By comparison, public sector pay rose by 5.5%. Recent pay awards in the National Health Service and some settlements from the government after widespread industrial action helped to push up this increase. The UK’s overall growth of regular pay has been held at about 3.4% because of this increasing chasm between the public and private sectors.
Softening Labor Market and Interest Rate Outlook
Overall employment activity is definitely starting to cool. The national rate of unemployment was unchanged at 4.9% for the three months to May. But there was a general drop of 7,000 job vacancies to 712,000 in the period ending in June.
This decrease in jobs was significant for small businesses, which are struggling with rising wages and expenses. In addition, data on employment gathered by HM Revenue & Customs showed that payroll declined by 4,000 in June, and by 71,000 in the year to June. This was mainly in the hospitality, retail, manufacturing and information technology businesses.
The economists had a silver lining with this slow private sector pay growth, considering it as a sign of inflation. The Bank of England will be reassured by slower wage growth, indicating that it is at long-awaited last stage.
Given the current level of regular pay growth, which is low enough to be in line with the Bank’s 3.25% pay growth forecast (which is aligned with its inflation target of 2%), analysts are not anticipating any interest rate cuts in the short term, but are looking for cuts to happen in the latter part of this year. But, experts caution further geopolitical threats, like Middle East tensions and a potential rise in oil prices, could still mar this fragile economic forecast.
