UK wage growth inches higher as unemployment falls to 42-year low

UK unemployment has unexpectedly fallen to a new 42-year low and helped nudge average earnings slightly higher, though real wages remain in decline due to elevated inflation.

The ILO unemployment rate for the three months to June eased to 4.4%, the lowest level since 1975 as 32.07m people were in work during the period, from the 4.5% at which it was forecast to remain.

Average earnings growth for the same three month period improved to 2.1% from 1.9%, the Office for National Statistics revealed, when the consensus forecast had pointed to a worsening to 1.8%.

Excluding bonuses, average earnings rose 2.1%, which was also higher than the 2% level from a month ago that was expected to prevail.

More timely data from July showed the claimant count dropped 4.2K, bigger than the 3.7K expected and an improvement from the 3.5K in June.

On the downside, the ONS acknowledged that adjusting for the consumer price inflation running at 2.6%, it meant average real weekly earnings fell by 0.5%, both including and excluding bonuses, compared with a year earlier.

Also worth noting, there were 883,000 people in employment on 'zero-hours' contracts in their main job, 20,000 fewer than for a year earlier.

EASING PRESSURE FOR RATE HIKE

An immediate reaction to the improved data was a rise in sterling from its six-week lows against the dollar and close-to-seven-year lows on the euro.

As the headline number of average earning index is a lagging indicator, analyst Naeem Aslam at Think Markets said it was therefore important for traders "not to bet the house based on this number".

"Nonetheless, the data released confirm there is no immediate need for the Bank of England to sanction tighter monetary policy. Simply put, the pay gains are strong but the policy members would still need to cautious. If the unemployment rate remains at record low levels and the output does not spike, then it would imply that most of the impact by Brexit would be on the supply side.

"The wage Philips curve would roar under that scenario and it would prompt the committee members to come out of their zombie mode. For now, the main challenge for the BOE is to ward off the challenges which surface due to Brexit."

Economist Chris Williamson at IHS Markit agreed that the "persistent lack of any significant upturn wage growth" had further dented the prospect of interest rates rising, especially given the previous day's figures showing a steadying of inflation in July.

Although the unemployment rate fell, Williamson said that "the tightness of the labour market is still not translating into the sort of wage growth that we would normally be seeing with such few people out of work. It’s therefore hard to make the case that wage growth will spike higher, warranting higher interest rates, any time soon".

The tightness of the labour market should deliver further rises in nominal wage growth over the coming quarters, said Ruth Gregory at Capital Economics.

"Earnings growth still needs to gather more pace in order to match the rise in CPI inflation – which we expect to peak at about 3% later this year. But at least CPI inflation is likely to fall back next year as the impact of the drop in the pound dwindles. What’s more, the tightness of the labour market should deliver further rises in nominal wage growth over the coming quarters," she said.

"Overall, then, while the MPC will no doubt be keeping a close eye on the pick-up in domestic inflationary pressures, for the moment, the figures provide re-assurance that consumers won’t rein in their spending too sharply in the face of higher inflation."