UK Wage Growth Slows Sharply to 3.8%, Marking a Five-Year Low
The Office for National Statistics (ONS) has reported that UK wage growth fell to 3.8% in the three months to January, down from 4.2% in the previous period. This decline represents the slowest rate of wage growth in more than five years, exceeding forecasts by City economists who had anticipated a smaller dip.
Unemployment Holds Steady at 5.2% Amid Labour Market Shifts
While the unemployment rate remained unchanged at 5.2%, the labour market shows signs of strain, particularly for younger workers. Job vacancy rates stayed steady, and the number of people entering the labour market increased only slightly, according to the ONS data.
Younger workers are facing significant challenges, with unemployment among those aged 18-24 rising to its highest level since 2015. Nearly 600,000 individuals in this age group are currently out of work and seeking employment. Martin Beck, chief economist at WPI Strategy, highlighted a stark divide: "Since payroll employment peaked in mid-2024, the number of employees aged 34 and under has fallen by almost 220,000, while employment among those aged 35 and over has risen by 110,000. This indicates that employers are cutting back most sharply on entry-level hiring."
Public Sector Wage Settlements Impact Overall Earnings
A reduction in public sector wages growth was a key factor in the overall drop in average earnings growth, excluding bonuses. Public sector wage settlements, often delayed and including bonuses to offset previous inflation spikes, have begun to drop out of annual figures, bringing down the average. Annual average regular earnings growth stood at 5.9% for the public sector and 3.3% for the private sector.
The Chartered Institute of Personnel and Development described the rise in youth unemployment as "a huge waste of potential," underscoring concerns about long-term economic impacts.
Bank of England Faces Dilemma Amid Geopolitical Tensions
The slowdown in wage growth is unlikely to influence Bank of England policymakers, who are expected to leave interest rates on hold at 3.75% during their upcoming meeting. This decision comes amid escalating Middle East conflicts and a steep rise in oil prices, which have surged by 25%.
Peter Dixon, a senior economist at the National Institute of Economic and Social Research, noted that the labour market's weakness presents a dilemma: "The continued weakness of the labour market will add to the headaches facing the Bank of England ahead of today’s interest rate decision. While there are upside risks, we view these as limited due to the fragility of overall activity and the potential for AI-related changes in the labour market, which will act as a further damper on wages."
Jake Finney, a senior economist at PwC UK, added that the labour market's fragility reduces the likelihood of higher energy prices feeding into broader inflation, making further rate hikes harder to justify. However, rate cuts remain unlikely until geopolitical tensions ease.
In a related development, the US Federal Reserve recently held interest rates at a range of 3.5% to 3.75%, resisting pressure for reductions. This global context underscores the complex interplay between wage trends, inflation, and monetary policy in uncertain times.
