UK Reaction: Employment slowing as wage growth picks up the pace

• Unemployment rate rose to 4.2% in June 2023, above consensus estimates unemployment remaining at 4%.
• Falls in employment drove the increase in unemployment. Employment was down by 66,000 compared to consensus expectations of a 75,000 rise and a 38,000 decline in inactivity also contributed to the pickup in unemployment.
• Wage growth picked up in June rising to 7.8% – the highest level since records began in 2001 (consensus 7.4%) from 7.5% in May (revised up from 7.3%). Private sector wage growth also rose to 8.2% above the Bank of England's expectations of 7.6%.
• Slack is growing, but elevated wages will keep the BoE's concerns of inflation persistence front and centre. We continue to expect a hike from the BoE at its next meeting in September bringing Bank Rate to 5.5%.

The UK unemployment rate rose to 4.2% in June 2023 (consensus 4.0%) – its highest level since October 2021 – driven by falls in employment and rising inactivity adding to pick-up. Wage growth also remained elevated, rising to 7.8% – the highest level since records began in 2001, and private sector pay also rose by more than expected. Despite signs of slack emerging more concretely in the employment data, elevated wage growth will keep the BoE's concerns of inflation persistence alive. We continue to expect the BoE to hike by 25 basis points (bp) at its next meeting, bringing Bank Rate to 5.5%, which we think will prove a peak.

Employment declined by 66,000 over the quarter, following months of signals of weakening employment sentiment from surveys. This came below consensus expectations of a 75,000 rise in employment. The decline was driven by a fall in self-employment (-78,000), whilst the number of employees picked up modestly (+22,000) over the quarter. In terms of hours, the fall in jobs was driven by full-time employment (-141,000) and part-time employment rose (+75,000). We expect employment to continue to ease, but uncertainty remains and HMRC payrolls figures for July remain elevated pointing towards a 97,000 monthly increase. 

The economic inactivity rate continues to decline as workers who left the workforce over the pandemic continue to gradually return to the labour force, but the pace appears to be slowing. Inactivity declined to 20.9% and was down by 68,000 on the quarter. Recent moves were driven by a decline in inactivity due to looking after family/home (-78,000). Long-term sickness likely exacerbated by pressures in the National Health Service (NHS) also continues to rise (+26,000) and the number of students also rose on the quarter (+22,000).

Vacancies continue to moderate with declining by 65,000 in the quarter to July 2023 to 1 million – its 13th consecutive quarterly decline. The level of vacancies still remains relatively high when compared to historic levels – vacancies are 1.2 times their levels just prior to the pandemic (Dec-Feb 2020) but firms continue to reduce vacancies reflecting uncertainty across industries, with economic pressures cited as a key concern for holding back on recruitment. 

Wages pressures appear to be accelerating, instead of easing. Regular wages (excluding bonuses) were up 7.8% (consensus 7.4%) and total pay (including bonuses) rose by 8.2% (consensus 7.8%). Upward revisions to previous data contributed to the upside surprise, with May's total pay figure revised up to 7.5% from 7.2%. Public sector pay deals added to the increase, one-off payments made as part of the some NHS worker's pay deals also added to the strength seen in bonus payments. The BoE expected private sector pay at 7.6% in June, but it rose 60bp above its expectations to 8.2%. For the first time in 19 months' pay (both including and excluding bonuses) is rising in real terms, which is likely to support demand going forward, though this is only likely to provide material support if job losses are contained.

On the one hand the labour market is seeing slack emerge much faster than the BoE anticipated. Unemployment now stands close to the Bank's most recent estimate of the non-accelerating inflation rate of unemployment of 4.25%. Furthermore, the BoE's August projections expected unemployment to rise to 4.2% in Q2 2024. At the same time, wages which are key for medium term inflation remain elevated and not all of the upside surprise can be explained by data revisions.

We continue to expect the BoE to hike Bank Rate by 25bp at its next meeting in September, bringing Bank Rate to 5.5%. Following this we expect the BoE to remain on hold, but signs of continued strength in wages could see the BoE continue to hike. Tomorrow's CPI data remains important and we will see another month's labour market and inflation releases before the September meeting which will be key.