Britain's labour market is showing persistent signs of weakness amid growing domestic and international uncertainties, with business hiring demand remaining subdued and wage growth decelerating to its slowest pace in nearly six years. Data released on Tuesday by the Office for National Statistics revealed that the number of employees on company payrolls fell by 13,000 in July, matching a similar decline in the previous month, while job vacancies dropped further to 707,000 during the May-to-July period, the lowest level since 2021.
Meanwhile, private sector wage growth excluding bonuses, a key metric closely monitored by the Bank of England, slowed to 2.8% in the second quarter, marking its weakest reading in almost six years. The unemployment rate held steady at 4.9% in the three months to June, slightly above the 4.8% figure economists had anticipated.
Liz McKeown, director of economic statistics at the ONS, noted that the labour market "still clearly shows some signs of weakening." She attributed the decline in job vacancies primarily to smaller businesses, which cited labour and operating costs as reasons for not hiring new staff or replacing departing employees. However, it is worth noting that the ONS has previously cautioned that the quality of these figures has deteriorated due to errors in the data collection process.
Despite some earlier indications that the jobs market was stabilising, businesses appear reluctant to take on new workers given the heightened uncertainty surrounding the Middle East conflict and the first budget from new Prime Minister Andy Burnham later this year. Ashley Webb, chief UK economist at Capital Economics, commented: "These data support our view that the UK labour market will not fuel a second round of inflation effects, and the Bank of England will not raise interest rates further from 3.75%. All these factors collectively paint a picture of a weak labour market, and this cooling trend is still ongoing."
Employment numbers in the UK have been on a steady decline for nearly two years, largely due to the sluggish economic environment and the Labour government's increases to payroll taxes and the minimum wage. Bank of England Governor Andrew Bailey has previously described Britain as a "low-hire, low-fire economy."
Economists Anna Andrade and Matt Bunny stated: "The latest batch of employment data continues to depict a cooling labour market, possibly influenced by rising energy costs and tighter financing conditions. We believe this trend will persist for some time and expect the unemployment rate to keep climbing through the remainder of the year. Against this backdrop, the Bank of England faces a difficult trade-off between bringing inflation back to target and limiting the drag on economic activity, which also supports a wait-and-see approach to the energy shock. Our base case is that interest rates will remain unchanged throughout 2026."
The Bank of England kept its benchmark rate at 3.75% as expected in late July. Policymakers preserved their options, maintaining guidance that the committee stands "ready to act" to prevent high inflation from becoming entrenched, while grappling with volatile energy prices in recent weeks. Nevertheless, the Bank's policy committee indicated that signs of easing domestic inflationary pressures were "clear," and so far there was "little evidence" that the energy shock had pushed up wage demands or prices in other sectors.
Most policymakers who voted to hold rates also signalled that their stance could shift if the war ends soon, with two members, including Deputy Governor Dave Ramsden, indicating they would consider cutting rates in such a scenario. Bailey remarked at the time: "There is currently little evidence of second-round effects, though it is too soon to feel relieved. Given that the global macroeconomic environment looks more uncertain with stronger inflationary pressures, while the domestic environment is broadly more benign for the inflation outlook, keeping the Bank's benchmark rate unchanged is appropriate."
The weak labour market, easing domestic price pressures, and tighter financial conditions have bought the Bank of England's Monetary Policy Committee some time to assess the war's impact on the UK economy. However, even though current inflation is broadly in line with the Bank's spring projections, price growth is expected to accelerate in the coming months, driven by the hike in household energy bills in July and a renewed rise in motor fuel costs. Additionally, ongoing tensions in the Middle East could keep oil prices elevated, which appears likely to intensify domestic price pressures and force the Bank of England into a more difficult balancing act between curbing inflation and supporting economic growth.
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