UK Unemployment Rises as Wage Growth Surges; GBP/USD Advances on Wages

Labor Market Overview, UK – January 2025

The latest UK labor market data presents mixed signals for investors, complicating the Bank of England’s (BoE) rate path outlook. November’s data will likely reignite renewed debate on the Bank of England’s post-February options.

The UK unemployment rate increased to 4.4% in November, up from 4.3% in October, indicating a deteriorating labor market. Meanwhile, average hourly earnings (including bonuses) rose 5.6% in the three months to November 2024, compared to the same period in 2023, up markedly from 5.2% in October.

The Office for National Statistics revealed the following key trends:

• The number of payrolled UK employees declined by 32,000 month-on-month in November but increased by 95,000 between November 2023 and November 2024.
• Early estimates of payrolled employees for December 2024 painted a similar picture, falling 47,000.
• Job vacancies fell by 24,000 from October 2024 to December 2024, marking the 30th consecutive period of decline.
• The claimant count edged up slightly in December.

Higher Wages and Unemployment Muddy the BoE’s Policy Outlook

Rising unemployment and accelerating wage growth could become the new norm after the UK budget. While accelerating wage growth fuels demand-driven inflation, the current environment suggests unemployment trends may dictate consumption and inflation trends.

UK businesses warned of job cuts because of higher wages under the UK Budget. This warning may signal a divergence between wage growth and unemployment as indicators for consumption and inflation trends.

Despite typically fueling inflation, November’s wage growth did not translate into higher consumption or inflationary pressures, highlighting the overriding influence of unemployment trends.

UK retail sales unexpectedly fell 0.3% in December, reversing a 0.1% rise in November, suggesting a softer inflation outlook. The softer labor market and drop in spending led to core inflation falling from 3.5% in November to 3.2% in December.

Despite rising wages, the BoE should be able to look past short-term trends to justify a rate cut in February. This is assuming that inflation continues to ease amid rising unemployment. However, BoE policy uncertainty could intensify after February. The BoE may want to ensure inflation continues softening on rising unemployment rather than accelerate due to wage growth.

Expert Insights on the UK Economy and BoE Rate Path

Commenting on the UK economy and BoE policy, Mohamed A. El-Erian, President of Queen’s College, Cambridge, and former CEO/co-CIO of PIMCO, stated,

“As illustrated this morning in the UK, not all declines in government bond yields happen for good reasons. Today’s drop in borrowing costs reflects the downside surprise in retail sales which fell by 0.3% in December. This followed the 0.1% gain in November and was well below the consensus forecast growth of 0.4%. Also notable, the pound has weakened, trading again below 1.22.”

GBP/USD Response to the UK Labor Market Data

Ahead of the November UK labor market report, the GBP/USD briefly climbed to a high of $1.23446 before tumbling to a low of $1.22470.

After the release of the UK Labor Market Overview Report, the GBP/USD dipped to a low of $1.22629 before rising to a high of $1.22744.

On Tuesday, January 21, the GBP/USD was down 0.36% to $1.22728. The Pound’s reaction to rising wages and a higher unemployment rate highlighted the uncertainties of the diverging trends on the BoE rate path.

The outlook remains challenging, with job cuts and waning consumer spending reflecting a grim picture for UK households and businesses.

Bank of England forward guidance will be crucial, following this week’s data. Greater focus on unemployment and consumption trends could signal a more dovish BoE rate path, pressuring the GBP/USD pair. Conversely, concerns about wage growth could dampen bets on multiple BoE rate cuts.

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