Labour Market official data stacks up better than survey sentiment

25 February 2025

The continued rise in pay growth, combined with signs that the labour market is stronger than the collapse in survey data has been suggesting, will keep the Bank of England (BoE) on its “gradual and careful” rate-cutting path.

We still expect the Monetary Policy Committee (MPC) to cut rates at roughly every other meeting, leaving interest rates at 3.75% by the end of 2025.

Survey data overstates collapse in employment?

Despite negative sentiment in most survey data, which points to a huge fall in employment, the official data is showing a much more gradual loosening of the labour market.

The ONS revised December’s big fall in payrolled employees from -47,000 to -14,000. January also saw a rise of 21,000 on this measure, well above estimates.

What’s more, employment jumped by 107,000 in the final quarter of last year. Vacancies, while trending down over the last two years, also rose by 10,000 in January, suggesting the labour market may be stabilising.

The upshot from official data is that the labour market is holding up much better than the survey data has suggested. It’s not strong by any stretch of the imagination, but neither is it pointing to a surge in unemployment.

However, firms still have time before April’s tax rises to adjust their hiring plans.

Pay growth remains on upward trajectory

Weakening employment usually means slower pay growth. Yet December’s wage growth accelerated to 6%. Public sector pay growth remains elevated at 4.8% as new pay deals continue to take effect. Private sector pay growth rose to 6.3%. (See Figure 1 below.)

A more important indicator for the BoE is regular private sector pay growth, which excludes bonuses. It has a much closer relationship with inflation than total sector pay.

In the three months to January, it increased again to 6.2%. Part of the recent increase is due to base effects from a particularly weak period of growth in the final quarter of 2023. Yet underlying momentum has also picked up on a three-month-on-three-month annualised basis, where private sector pay growth rose from 7.6% from 7.1%.

Will pay growth continue?

Looking ahead, we expect pay growth to slow, particularly in the private sector, for two reasons.

First, the recent increase in employment costs will eat into profit margins and prevent firms from continuing to boost pay growth at current rates.

Second, even if the labour market is holding up better than the survey suggest, hiring is still weak. This will provide some natural downward pressure on wage growth.

The flip side is that strong pay growth means real wages, which are inflation adjusted, are now growing by 2.5% y/y. Excluding the pandemic, that's the strongest real wage growth since 2015. Eventually this should find its way into consumer spending.

The policy outlook

The BoE opted to start the year with another 25bps rate cut in February, while maintaining a cautious tone and emphasising gradual cuts. That said, two members voted for a bumper 50bps cut, reflecting worries about sluggish growth.

The current guidance makes it clear the MPC thinks a gradual approach remains appropriate. Inflation looks set to rise well over 3% in the coming months. This is reflected in today’s official data showing prices rose by 3% in January – a 10-month high. This inflationary pressure was enough to deter the rest of the MPC from a more significant cut.

Yet the most recent data does provide the BoE with a conundrum.

A weak labour market combined with anaemic economic growth would call for looser monetary policy. But at 6%, wage growth is far above the 3% rate consistent with 2% inflation. The MPC will be aware they must tread carefully with future cuts. If anything, evidence that the labour market is holding up better than suggested will make the BoE more cautious in future meetings.

There are risks on both sides. If strong pay growth continues and higher inflation materialises, then the BoE could choose to hold off on rate cuts to ensure underlying inflation is squeezed out. Equally, if growth continues to disappoint and the labour market does cool as swiftly as survey data has been suggesting, then further cuts could be likely.

Currently, our base case remains three more interest rate cuts this year.