UK QUARTERLY ECONOMIC OUTLOOK | Q1 2025
Labour market
Weakening, but not collapsing
In the wake of last year’s autumn budget, survey measures of firms' hiring intentions have collapsed. However, the hard data suggests the labour market is only gradually easing rather than unemployment surging. Admittedly, it’s early days and the most significant policies announced in the budget won’t come into effect until April, so we could still see a sharp fall in employment. But a subdued outlook for employment seems more likely than a total collapse. This, along with firms dealing with the increase in National Insurance costs announced in the autumn budget, should help to put some downward pressure on wage growth.
The problems the Office for National Statistics (ONS) is having with the Labour Force Survey (previously the gold standard for labour statistics) means it’s difficult to get a clear read on how the labour market is performing. For example, based on the official labour market data, employment has grown by 500,000 (1.5%) since May. But the number of people on HMRC payrolls has been flat. Given the flatlining in the economy in the second half of last year, the payroll figures are more believable.
The upshot is that even if the surveys are overstating the weakness in hiring, a chill has descended over the labour market.
We expect hiring to remain pretty flat for the first half of this year before gradually picking up as the broader economy improves. However, despite the weakness in the labour market, it is still generating very strong wage growth. Total average pay growth reached 6% in December and private regular pay growth, which is the measure the MPC pays most attention to, rose to 6.2%. Some of this can be attributed to public sector pay awards and base effects, but it’s clear that underlying pay growth is still running hot.
There has been a structural change in the labour market whereby wage growth is now higher for a given unemployment rate than it was before the pandemic. For example, in 2018, the unemployment rate averaged 4.1%, a fair bit below the current 4.4%, but pay growth was just 3%. This is probably because employees' inflation expectations are higher now and the huge increase in inactivity levels since the pandemic has artificially tightened the labour market.
We still think that wage growth is likely to slow for two reasons. First, a colder labour market should gradually filter through to lower pay deals as competition for workers dries up. Second, as firms grapple with the increase in employment costs imposed on them, they will try to recoup these costs by passing on lower wage rises in the future. But we expect wage growth to only slow to around 4% by the end of the year.
Employment
