UK salary growth slows, paving the way for potential interest rate cuts
Wage growth in the UK slowed last month while demand for workers remained steady, potentially setting the stage for further interest rate cuts by the Bank of England.
Research from KPMG and the Recruitment and Employment Confederation (REC) reveals that the growth rate of salaries for both permanent and part-time staff decreased in July. The permanent staff salary index dropped to 56.5 from 57.1 in June, remaining above the 50-point mark that signifies growth. The temporary salary index also declined, falling to 50.9 from 53.7.
These figures, closely monitored by the Bank of England due to concerns about the accuracy of official labour market estimates, indicate that wage growth is easing from record highs. This trend is partly attributed to the impact of stringent monetary policy on economic demand. Over the past two years, robust salary growth has helped mitigate the effects of the cost of living crisis on workers’ real incomes.
Hiring also contracted in July, with the KPMG and REC permanent placement index reading at 47.7, suggesting businesses hired fewer full-time staff. However, the slowdown in recruitment was less severe than the previous month. The vacancy index rose slightly to 49.1 from 48.6, while the temporary hiring index dropped to 49.8 from 50.3.
Kate Shoesmith, deputy chief executive of the REC, commented: “The weaker growth in both salaries and temporary pay suggests that employers are aligning pay with inflation as desired by the Bank of England. The interest rate cut is a welcome measure, and employers will need continued support to maintain confidence.”
This month, the Bank of England cut the base rate by 0.25 percentage points to 5 per cent. The monetary policy committee stated it is now considering the overall economic data rather than focusing on specific indicators. Financial markets anticipate two more quarter-point cuts this year.
The central bank has expressed concerns about the challenges in assessing labour market trends due to declining data quality from the Office for National Statistics (ONS). Low response rates to the ONS labour force survey have raised doubts about its reliability. Consequently, the bank is now relying on alternative research, including the KPMG and REC jobs report.
Analysts predict the UK economy will gain momentum later this year, potentially leading companies to ramp up recruitment to meet increased demand. The Bank of England recently revised its GDP growth forecast for 2024 upwards to 1.25 per cent from 0.5 per cent.
In its annual revisions, the ONS upgraded its estimates of the UK’s post-Covid economic recovery. The economy expanded by 4.8 per cent in 2022, up from an initial estimate of 4.3 per cent. The GDP contraction in 2020 was revised to 10.3 per cent, less severe than previously thought.
By the end of 2022, the economy was 2.1 per cent larger than its pre-Covid size, an improvement on the ONS’s earlier estimate of 1.9 per cent. The UK’s recovery was initially considered the slowest among the G7, but revised data shows it was around the group’s average.
Jon Holt, chief executive and senior partner of KPMG in the UK, remarked, “With forecasts for economic growth improving and potential further interest rate cuts in the coming months, there are green shoots of economic recovery.” He added that some businesses might delay hiring until after Chancellor Rachel Reeves presents her first budget on October 30, seeking more clarity on fiscal policy. The chancellor has indicated that tax increases are on the horizon.
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UK salary growth slows, paving the way for potential interest rate cuts
