UK workers’ pay growth has slowed to its weakest rate in six months, despite record employment, adding to the Bank of England’s dilemma of whether to raise interest rates for only the second time since the global financial crisis.
Average weekly earnings rose by 2.5% on the year in the three months to May, losing speed from the previous three-month period, when they grew by 2.6% and its weakest since the three months to November, the UK’s Office for National Statistics said.
Pay growth excluding bonuses — which the Bank of England says sometimes gives a better picture of the underlying trend — slowed by a similar amount, to 2.7%. Both readings were in line with the average forecast in a Reuters poll of economists. Britain’s economy appears to be picking up, after a slow first three months of the year, when unusually heavy snow hurt demand, and the central bank worries it is bumping up against the speed limit that would start to push up inflation.
The new data showed the unemployment rate remained at its joint-lowest since 1975, at 4.2%, while the proportion of people in work rose to a record high of 75.7%, after 137,000 jobs were created over the three months to May. But economic growth since 2016’s Brexit vote has been weak by historic standards, due to high inflation and business uncertainty. This week, the IMF cut Britain’s growth forecast for 2018 to 1.4%.
Pay growth is one of the pieces of data the Bank of England is likely to look most closely at, as it mulls whether to raise interest rates next month, in what would be only the second rate increase since before the 2008 global financial crisis. Bank of England governor, Mark Carney, said, at the start of the month, that both the economy and pay were growing, as the central bank had forecast in May, smoothing the way for an August rate rise.
But, last week, one of his deputies, Jon Cunliffe, who opposed November’s rate rise, said pay growth did not seem to be breaking out of its recent, 2.5% to 3% range and heading toward the 3% growth rate the Bank of England predicts for the end of the year.
Britain had seen numerous “false dawns” for pay growth in the past, and there could be more spare capacity in the labour market than the central bank thought, he added. “We’ve had yet another record employment rate, while the number of job vacancies is also a new record. From this, it’s clear that the labour market is still growing strongly,” ONS statistician, Matt Hughes, said.