British salary growth is slowing, paving the way for possible interest rate cuts

Wage growth in Britain slowed last month while demand for workers remained stable, potentially paving the way for further interest rate cuts by the Bank of England.

Research from KPMG and the Recruitment and Employment Confederation (REC) shows that the growth rate of salaries for both permanent and part-time staff decreased in July. The permanent staff salary index fell to 56.5 from 57.1 in June, remaining above the 50-point mark indicating growth. The temporary wage index also fell from 53.7 to 50.9.

These figures, which are closely watched by the Bank of England due to concerns about the accuracy of official labor market estimates, indicate that wage growth is slowing 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 soften the impact of the cost of living crisis on workers’ real incomes.

Hiring also fell in July, with KPMG and REC’s permanent placement index at 47.7, indicating companies were hiring fewer full-time staff. However, the hiring delay was less severe than the previous month. The vacancy index rose slightly from 48.6 to 49.1, while the temporary employment index fell from 50.3 to 49.8.

Kate Shoesmith, deputy director of the REC, commented: “Weaker growth in both salaries and casual wages suggests that employers are aligning wages 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 lowered the base interest rate by 0.25 percentage points to 5 percent. The Monetary Policy Committee said it is now considering overall economic data rather than focusing on specific indicators. The financial markets expect to drop another two quarter points this year.

The central bank has raised concerns about the challenges in assessing labor market trends due to declining data quality from the Office for National Statistics (ONS). The low response rate to the ONS Labor Force Survey has cast doubt on its reliability. That is why the bank now relies on alternative research, including the jobs report from KPMG and REC.

Analysts predict the UK economy will gain momentum later this year, potentially causing companies to ramp up recruitment to meet increased demand. The Bank of England recently revised its GDP growth forecast for 2024 upwards from 0.5 percent to 1.25 percent.

In its annual revisions, the ONS has revised upward its estimates of Britain’s economic recovery from Covid-19. The economy grew by 4.8 percent in 2022, compared to an initial estimate of 4.3 percent. The GDP contraction in 2020 was adjusted to 10.3 percent, which is less severe than previously thought.

At the end of 2022, the economy was 2.1 percent larger than before the corona crisis, an improvement on the ONS’ previous estimate of 1.9 percent. The UK recovery was initially considered the slowest in the G7, but revised data shows the recovery was around the group average.

Jon Holt, CEO and senior partner of KPMG in Britain, commented: “With improving economic growth forecasts and potential further rate cuts in the coming months, there are green shoots of economic recovery.” He added that some companies could delay hiring until after Chancellor Rachel Reeves presents her first budget on Oct. 30, seeking more clarity on fiscal policy. The Chancellor has indicated that tax increases are in the offing.