And the latest economic indicators are cooling on this dramatic change in religious belief in UK labor markets. Indeed, forecasts have the yearly inflation rate falling below 4% in November. The Bank of England is seriously thinking about interest rate cuts. This decision is coming under growing scrutiny, especially as it’s tied to the huge increases in discretionary government spending occurring this fiscal year. Enacted spending increases so far would be highly unusual to roll over into next year. Alarmingly, this begs the question of how long this economic momentum is able to last.
Recent data reveals that while wage growth has outpaced many economists’ forecasts in previous years, the private sector’s wage growth is now on a downward trajectory. The labor market appears to be cooling, as indicated by the increase in the unemployment rate to 4.8%. The three-month annualized rate of private sector pay growth has inched up to 2.4%. This is the lowest jump in nominal wages since the last recession.
In addition to the wage growth slowdown, a number of recent surveys are showing business confidence starting to turn marginally more positive. This development suggests that the adverse effects of April’s tax hikes may have peaked, providing a glimmer of hope for economic resilience. Businesses are reporting average annual pay growth of 4.4%. That’s down from 6% at the start of the year, underscoring the difficulties of sustaining robust wage growth in a rapidly changing economic environment.
The changes in the employment picture similarly tell of continued shifts and rebalancing. The monthly count of payrolled employees continues to decline. The rate at which this decline is occurring has significantly decelerated from the spring months of 2023. This long-term trend has implications for the current tight labor market and future economic growth’s dependence on it.
Debate on Bank of England rate cuts has already started to boil over. Unfortunately, a 25 basis point reduction in the rate during November now appears quite unlikely. Now analysts are predicting a December rate cut should not be ruled out. They warn that the Bank could decide to hold off until February before moving again. By then, it will have access to an additional month of all-important LC-130 data. It can use this new information to inform and improve its decision-making process.
Looking even further ahead, the outlook is for three rate cuts in 2026, well above current market pricing. As worries about the long-term economic environment continue to mount. If things do not get better, we have to make more forceful monetary policy changes.