UK wage growth beats expectations as unemployment ticks up

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UK wage growth was higher than expected in the three months to February, according to official data, which also showed a sharp rise in unemployment and worsening economic inactivity.

Annual growth in average weekly earnings, including bonuses, was steady at 5.6 per cent, against analysts’ expectations of a slowdown to 5.5 per cent.

Excluding bonuses, the Office for National Statistics said on Tuesday that annual earnings growth slowed from 6.1 per cent to 6 per cent, remaining stronger than the 5.8 per cent pace analysts had expected.

The unemployment rate averaged 4.2 per cent in the three months to February, up 0.3 percentage points from the previous three-month period.

The combination of persistently high wage growth and a weaker jobs market will send mixed signals to policymakers at the Bank of England trying to gauge how far inflationary pressures in the economy are easing.

Hawks on the Monetary Policy Committee have expressed concern that strong wage growth could continue to fuel consumer prices even as the energy price shock subsides. But others on the MPC believe workers’ bargaining power is already weakening as the jobless rate rises and labour shortages ease.

Elizabeth Martins, economist at HSBC, described the data as “a headache for policymakers” but added that investors might give more weight to the pay data, as they were already wondering whether a stronger US economy that delayed rate cuts by the Federal Reserve might influence the BoE.

“Investors are wondering whether the UK might see the same stalling in its disinflation progress . . . this release has done little to reassure them,” she said.

However, other economists said there were now clear signs that weakness in the economy was starting to hurt jobs, with employment falling on more than one measure and more people claiming jobless benefits, as well as a fresh rise in the already troubling rate of economic inactivity.

“Rising redundancies and falling job levels are signs of a stagnant economy, while rising inactivity and long-term sickness suggest there are wider issues with the health of our workforce,” said Charlie McCurdy, economist at the Resolution Foundation think-tank.

The stronger real-terms pay growth for those in work was “the only silver lining” in the data, he added.

Paul Dales, chief UK economist at the consultancy Capital Economics, said that without this “clear weakening in activity in the labour market, we’d be a bit worried that the UK’s disinflation process is grinding to a halt like in the US”.

But he said the sharp fall in employment suggested wage growth would continue to ease. This could allow the BoE to start cutting interest rates from their current 16-year high of 5.25 per cent from June onwards, even if the US Federal Reserve took longer to loosen policy.

The employment rate fell 0.5 percentage points to 74.5 per cent over the three months to February, while the share of working-age adults who were neither in work or job-seeking rose to 22.2 per cent.

The ONS has warned that short-term movements in jobs data may be volatile because of problems with the survey underpinning the figures.

But alternative indicators of employment — including tax records and claims for out-of-work benefits — also pointed to a drop in the number of payrolled employees and more people falling out of work. 

Sterling weakened by 0.2 per cent against the dollar after the figures were released.

Traders in swaps markets initially moved to fully price in two quarter-point rate cuts from the BoE by the end of 2024, before paring back these bets to a 90 per cent probability, as before the data release.