UK unemployment holds at 4.9% as wage growth steadies, backing BOE hold

Britain's unemployment rate held steady at 4.9% in the three months through May, defying economists' expectations for a rise to 5% and showing that the labor market deterioration may be stabilizing at weak levels. Annual wage growth excluding bonuses remained unchanged at 3.4% for a third consecutive month, the joint-lowest since October 2020, according to data released Tuesday by the Office for National Statistics.

"The broader picture is one of persistent employer hesitancy. Businesses continue to face cost pressures and are operating in an uncertain environment, now awaiting clarity on the economic direction under new Prime Minister Andy Burnham," said Jack Kennedy, senior economist at jobs platform Indeed.

Private sector wage growth, a metric closely watched by the Bank of England for its direct impact on domestic price pressures, fell to 2.9% — the weakest since 2020 and the first time below 3% in the current cycle. Including bonuses, average earnings rose 4.3%, down from 4.4% and below the 4.5% consensus. The number of payrolled employees edged down by 4,000 between May and June to 30.3 million, a smaller decline than the 20,000 drop economists had forecast, while job vacancies fell by 7,000 to 712,000 in the quarter to June. The decline was driven mainly by smaller businesses, which saw vacancies fall by 8,000, partially offset by an increase among medium-sized firms, the ONS said.

The employment rate for people aged 16 to 64 years was estimated at 75.1% for the March to May quarter, up from 75.0% in the previous three-month period but down from 75.2% a year earlier. The number of people employed increased by approximately 147,000, accelerating from the prior quarter's gain of around 100,000. Regular earnings continued to outstrip inflation, rising 0.4% above the Consumer Prices Index.

The data strengthens the case for the Bank of England to leave its benchmark rate at 3.75% when policymakers meet next week. Investors are pricing one or possibly two quarter-point rate increases by the end of 2026, though Tuesday's figures suggest domestic wage pressures remain contained. "Today's data reinforces the case for the Bank of England to keep interest rates on hold, with labor market conditions remaining soft and private sector wage growth continuing to ease," said Yael Selfin, chief economist at KPMG. "Private sector wage growth is now running below levels consistent with the Bank's inflation target, providing further evidence that domestic wage pressures are contained."

The labor market's fragility is compounded by an uncertain outlook. The escalation of the conflict in the Middle East threatens to keep energy prices elevated, potentially reigniting inflation even as domestic demand weakens. Bank of England Governor Andrew Bailey said last week that while the situation remains "unstable," the passthrough of higher energy prices into UK inflation has so far been "fairly soft." Consumer prices held steady at 2.8% in May, below economists' forecasts, with June data due Wednesday expected to show further easing.

Youth unemployment rose to 16.4% for 16- to 24-year-olds, the highest since 2014, highlighting the uneven nature of the labor market softness. Public sector borrowing fell to GBP15.99 billion in June, down from a revised GBP20 billion in May and roughly GBP300 million below the Office for Budget Responsibility's forecast, helped by lower inflation-linked debt interest costs. Borrowing for the fiscal year ended June stood at GBP57.6 billion, or 1.9% of GDP, down GBP3.7 billion year-on-year but GBP2.7 billion above the OBR's forecast.

Matt Swannell, chief economic adviser to the Item Club, cautioned that the apparent stabilization may prove temporary. "There are some signs that the deterioration in the labor market has bottomed out. But we think this will prove a temporary respite, and with a sustained reduction in the use of Strait of Hormuz looking increasingly likely, we expect high energy prices to weigh on growth and the jobs market."

The next test for markets comes Wednesday with the June CPI print, followed by the Bank of England's rate decision on Aug. 1. If inflation continues to moderate as expected, the combination of a cooling labor market and contained wage growth would give the Monetary Policy Committee little reason to tighten further.

This article is for informational purposes only and does not constitute investment advice.