Unemployment climbed and wage growth slowed in the three months to May, according to official figures that will pressure the Bank of England to cut interest rates next month.
Data from the Office for National Statistics, released on Thursday, showed that Britain’s official unemployment rate rose to 4.7% in the three months to May, up 0.1% from April to reach the highest level since June 2021.
Pay growth slipped from 5.3% to 5%, as forecast by City analysts. Unemployment had been expected to remain at 4.6%.
In the private sector, pay rises were 3.7% on average in May, a sharp fall from 4.3% in the three months to April.
The ONS director of economic statistics, Liz McKeown, said the labour market “continues to weaken”.
Against a backdrop of negative economic growth coupled with rising inflation, the figures are expected to give the Bank of England a headache before its next decision on interest rates on 7 August.
While inflation rose last month to 3.6%, above the central bank’s 2% target, Threadneedle Street officials are expected to be more concerned about figures showing the economy contracted by 0.1% in May, adding to a 0.3% decline in April.
Analysts are predicting two further interest rate cuts this year with the first to take place at the Bank’s August meeting.
Suren Thiru, the head of economics at the ICAEW accountancy body, said: “The UK’s jobs market has hit a rough patch with spiralling business costs and a wilting economy. These dispiriting figures probably seal the deal on an August interest rate cut.”
The figures also present a problem for the chancellor, Rachel Reeves, who is under pressure over Labour’s economic management and added labour costs for businesses.
Reeves is widely expected to raise taxes in her autumn budget but the weaker outlook for the UK economy and rising joblessness will make it more difficult to raise taxes without further harming growth.
These dispiriting figures probably seal the deal on an August interest rate cutSuren Thiru
Vacancies in the UK fell in June to 727,000, marking the 36th consecutive month of decline in the number of jobs advertised by employers, or three whole years.
The Federation of Small Businesses blamed Reeves for much of the economic slowdown.
Tina McKenzie, the FSB’s policy chair, said: “Ramping up jobs taxes, pushing through 28 new bits of employment legislation, and then on top of that mooting a hike in employer pension costs, is not a recipe for job creation and economic growth.”
The lobby group HospitalityUK also attacked tax hikes and extra employment costs that it said meant hotels, bars and restaurants had lost 84,000 jobs, or almost half the total since last October’s budget.
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Kate Nicholls, the chair of HospitalityUK, said: “These devastating job losses are a direct consequence of policy decisions at last year’s budget, which have disproportionately hit the hospitality sector.”
Alison McGovern, the minister for employment, said inflation-adjusted wages continued to rise, showing that the government was “helping more people into work and putting more money in their pockets”.
She added: “But we need to go further. Under our plan for change, job centres everywhere are changing to end the tick-box culture and serve employers and those who need work better.”
Helen Whately, the shadow work and pensions secretary, said the figures were “the latest in a litany of dreadful economic news – coming off the back of stoked inflation and depressed growth stats. These are more than just statistics, each and every job loss is a devastating blow to hardworking families across the country.”
Most economists said an interest rate cut in August was certain, but were divided about the central bank’s next move.
The National Institute of Economic and Social Research said high inflation meant further rate cuts would need to be delayed until next year.
Paul Dales, the chief UK economist at Capital Economics, said the latest inflation figures showed businesses were responding to higher national insurance contributions and an inflation-busting rise in the minimum wage by increasing their selling prices.
He said: “But the bigger response appears to be the reduction in headcounts, which should eventually weigh on inflation. That’s why we think the Bank will continue to cut interest rates gradually from 4.25% now to 3%.”
A snapshot of the jobs market in June by the Recruitment and Employment Confederation and the accountancy firm KPMG this week showed the number of new candidates looking for work rose at the sharpest rate since November 2020, when the UK entered the second nationwide lockdown during the Covid pandemic.