Slower UK salary growth paves way for more interest rate cuts

Wage growth eased last month and demand for workers steadied, potentially clearing a path for further interest rate cuts by the Bank of England.

According to research by KPMG and the Recruitment and Employment Confederation, the pace of salary growth for both permanent and part-time staff receded in July.

The permanent staff salary index fell to 56.5 last month from 57.1 in June, still above the 50-point threshold that separates growth from contraction. The temporary salary index dropped to 50.9 from 53.7 in June.

The figures, which are closely watched by the Bank of England owing to accuracy issues with official labour market estimates, demonstrate that pay growth is descending from record highs, partly because tight monetary policy is squeezing demand in the economy. Strong salary growth over the past two years has partially offset the impact of the cost of living crisis on workers’ real incomes.

Hiring contracted in July, with the KPMG and REC permanent placement index posting at 47.7. Although the reading signals that businesses hired fewer full-time staff in the month, the pace of the recruitment slowdown was less severe than the previous month. The vacancy index showed a similar trend, with the reading up to 49.1 from 48.6. The temporary hiring index dropped to 49.8 from 50.3.

Kate Shoesmith, deputy chief executive of the REC, said: “The weaker growth in both salaries and temp pay suggests that employers are keeping pay in line with inflation as the Bank of England want and the interest rate cut is welcome. Employers will need more of the same to maintain confidence.”

The Bank of England elected to cut the base rate by 0.25 percentage points to 5 per cent this month. Its monetary policy committee said it was now looking at the totality of economic data rather than specific information points. Financial markets expect two more quarter-point cuts this year.

The central bank has lamented the difficulty in judging trends in the labour market caused by a deterioration in the quality of data produced by the Office for National Statistics. Low response rates to the ONS’s labour force survey have sparked concerns about its validity. The bank is now scrutinising alternative research, including the jobs report published by KPMG and the REC.

Analysts expect the UK economy to pick up momentum as the year progresses, which could prompt companies to increase recruitment to meet higher demand. The Bank of England this month raised its GDP growth forecast for 2024 to 1.25 per cent from 0.5 per cent.

In annual revisions to legacy GDP data, the Office for National Statistics upgraded its estimates for how quickly the UK economy recovered from the Covid-19 crisis.

The statistics body said that the economy expanded by 4.8 per cent in 2022 from an initial estimate of 4.3 per cent. It also said that the GDP contraction in 2020, the year most affected by the pandemic, was shallower than first feared at a revised 10.3 per cent.

By the final three months of 2022, the economy was 2.1 per cent larger compared with its pre-Covid size, up from the ONS’s first calculation of 1.9 per cent. For some time, the UK was thought to have had the slowest rebound from the pandemic in the G7, but previous upgrades to the ONS’s data showed that the recovery was around the average in the group.

• Growth of UK economy upgraded but falls short of Labour’s target

“With forecasts for economic growth improving and potential further interest rate cuts over the coming months, there are green shoots of economic recovery,” Jon Holt, chief executive and senior partner of KPMG in the UK, said.

He added that some businesses might pause hiring until after Rachel Reeves delivered her first budget on October 30 to gather more certainty on the trajectory of fiscal policy. The chancellor has signalled that taxes will rise.