UK Wage Growth Rises As Bailey and Hunt Call for Wage Restraint 

The release of this morning’s UK labour market data indicates that average wages excluding bonuses grew 7.3%, beating market expectations by 20bps. This kept the figure in line with last month’s print and marked the highest since during the coronavirus pandemic period. Similarly, average earnings including bonuses came in stronger-than-expected, hitting 6.9% to bring the average weakly earning to £651. Finance and Manufacturing jobs saw the highest rate of wage growth with pay rising 8.1% and 7.7%, respectively.

When assessing the disparity between private sector and public sector, today’s data revealed that private sector wages excluding bonuses rose 7.7% against the public sector’s 5.8%. For the private sector this marked the highest pace of growth on record outside of covid.

Nevertheless, when accounting for inflation, average pay including bonuses fell 1.2% when adjusted for inflation, while excluding pay dropped 0.8%, as inflation (currently at 8.7%) continues to remain stubbornly high.

With wages rising faster-than-expected, markets are assessing the extent to which this may impact the BoE’s tightening cycle given its implications on inflation. Money markets have currently fully priced in a 25bps hike for the Threadneedle Streets 3 August, with a around a ¾ of percent chance of a 50bps hike. This comes as markets are forecasting the possibility of the BOE’s terminal rate being 6.5% as inflation fails to fall in line with previous projections.

Yesterday, the Governor of the Bank of England and Chancellor of the Exchequer outlined to an audience in Mansion House that high pay settlements were acting as a hinderance to get inflation back to its 2% target. At a dinner last night, the two reiterated their concerns over a wage price spiral, something which Bailey has repeatedly raised fears over. For example, Bailey stated that “both price and wage increases at current levels are not consistent with the inflation target” as the BoE grapples with headline inflation currently at 8.7%. His hawkish remarks at the dinner expressed how the BoE remains resolute in bringing inflation back down to their target as markets look towards Threadneedle Street’s August decision.

Here, Hunt stated that persistently high inflation “means taking responsible decisions on public finances, including public sector pay, because more borrowing is itself inflationary.” This comes as the government have to decide this week whether to support proposed pay rises for public sector workers of around 6%. Hunt also said that the high number of job vacancies is fuelling inflationary pressures but stated that “Our labour market reforms – including expanding free childcare next year – will help to build the high-wage, high-growth, low-inflation economy we all want to see.”

Earlier this year, the Bank of England’s chief economist stated that British households must accept that they’re worse and stop pushing for higher pay as real wages fall at their fastest rates for 20 years. In a nod to concerns over a wage-price spiral, Huw Pill stated that people “need to accept that they’re worse off and stop trying to maintain their real spending power by bidding up prices, whether [through] higher wages or passing the energy costs through onto customers”.

This morning’s data release from the ONS also indicates that UK unemployment has risen 20bps to 4%. This came in higher than the general market consensus of 3.8% and marks the highest print since Q4 2021. This comes as job vacancies fell to 1.034m in May from 1.057m in April. While unemployment is rising, there is still 1.3 jobs per unemployed person (excluding agriculture, forestry and fishing).

Yesterday, Recep Tayyip Erdogan agreed to support Sweden’s accession to NATO, as delegates from the 31-member alliance reconvene in Lithuania. This follows well over a year’s worth of political back-and-forth with President Recep Tayyip Erdogan’s u-turning several times over whether to veto Sweden’s accession or not. While Stockholm had previously pursued a policy of neutrality, the Russian invasion of Ukraine saw public opinion rise in favour of joining NATO, with Finland’s joining also boosting support.

As we looked at earlier this year previously Erdoğan sought to block Sweden and Finland’s NATO Accession as he maintained that Sweden’s links with the Kurdistan Workers’ Party (PKK) and other Kurdish organisations undermine Turkey’s security. Erdoğan’s Justice and Development Party (AKP) long been hostile to Kurdish secessionists and those living in the Northern Kurdistan region in Southwest Turkey. Following Trump’s decision to remove US troops who were assisting Kurdish forces fighting ISIL, in 2019 Erdoğan initiated a ground offensive and military occupation into the Kurdish region of north-eastern Syria. Many western states and EU members condemned the operation with Amnesty International stating that Ankara “have displayed a shameful disregard for civilian life, carrying out serious violations and war crimes, including summary killings and unlawful attacks that have killed and injured civilians”. As such both Sweden and Finland emplaced an arms embargo on Turkey, with diplomatic ties subsequently being strained.

With Erdogan agreeing to support Sweden joining NATO, Ankara has renewed calls for the EU to consider Turkey’s accession to the EU.