UK Wage Growth Surges Despite Weak Economy, BoE Remains Cautious

UK private sector wage growth accelerated in the last three months of 2024, reaching its fastest pace in a year, as reported by Reuters. This unexpected surge highlights the Bank of England's (BoE) cautious approach to interest rate cuts despite the overall weakness of the UK economy.

The Office for National Statistics (ONS) revealed that private-sector pay, excluding bonuses—the BoE's key indicator of domestic inflationary pressure—rose by 6.2% compared to the same period last year. This figure surpasses the 5.9% growth recorded in the three months leading up to November.

Sterling strengthened against the dollar following the data release.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), stated that the data does not indicate an economic downturn, suggesting that an interest rate cut at the BoE's next meeting in March is unlikely. However, Thiru added, "the downward pressure from a stagnating economy, a loosening labour market and April’s jump in businesses’ costs mean this current upswing (in pay growth) is likely to be short-lived."

Employers have expressed concerns that Chancellor Rachel Reeves's planned increase in social security contributions from April will negatively impact hiring and wage growth. Despite these concerns, the pace of pay increases remains significantly above the BoE's 2% inflation target.

The BoE, which previously anticipated 6.3% annual private sector wage growth in the fourth quarter (slightly higher than the ONS figure), now expects a deceleration in wage growth throughout 2025.

Huw Pill, the BoE's Chief Economist, recently told Reuters that he believes the UK's sluggish economy is primarily driven by supply-side issues, including a worker shortage.

The ONS reported that pay across the entire economy, excluding bonuses, increased by 5.9% in the three months ending December 2024, marking the strongest reading since April 2024. Including bonuses, pay rose by 6.0%, reaching its highest level since the end of 2023. These figures exceed the 5.9% growth predicted by a Reuters poll.

The BoE anticipates a slowdown in pay increases as the weak economy weighs on the labor market. While UK GDP stagnated in the third quarter of 2024, it unexpectedly grew by 0.1% in the final three months. However, a recent survey revealed that approximately one in three employers plan to reduce their workforce in response to Reeves's tax increase.

Official data released Tuesday showed that vacancies fell by 9,000 in the three months to January compared to the October period, but remain 23,000 higher than pre-pandemic levels. Data from employers to the tax authorities indicated a rise of 21,000 employees in January compared to December, marking only the third increase in the past eight months.