UK labour market loses more momentum in second quarter

The UK labour market showed signs of deceleration in the second quarter, with slower earnings growth and fewer job vacancies, data released on Tuesday indicated. Private sector earnings, a key inflation indicator monitored by the Bank of England (BoE), grew by 2.8% annually in the three months to June, the weakest expansion since October 2020.

The unemployment rate remained steady at 4.9%, slightly higher than economists' expectations of a decline to 4.8%. Despite these modest declines, the labour market's momentum appears to be weakening gradually, according to Rob Wood, chief UK economist at Pantheon Macroeconomics.

The number of open job vacancies fell to 707,000 in the three months to July, marking the lowest level since April 2021, the Office for National Statistics reported. Excluding pandemic-related factors, vacancies have hit their lowest point since late 2014. These labor market indicators, which predate Prime Minister Andy Burnham's appointment last month, suggest the economy is losing momentum, posing a potential downside risk for employment, according to Andrew Hunter, senior economist at Moody's Analytics.

BoE policymakers are likely to be content with the data, as they may refrain from raising interest rates for now. However, the central bank has hinted at a possible rate hike by the end of 2026 to account for rising energy costs resulting from the Iran war. The slightly weaker job market performance suggests the labour market is easing but at a slow pace.

Economists warn that ongoing tensions between the US and Iran, coupled with the prospect of further tax hikes in the October budget, could continue to weigh on employment prospects.