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Further Drop in UK Unemployment Expected, but Wage Growth to Remain Subdued

H.S. Borji
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Further Drop in UK Unemployment Expected, but Wage Growth to Remain Subdued

The UK unemployment rate declined further in June, but weak earnings growth continued to point to slack in the labour market, official data are expected to show on Wednesday.

The Office for National Statistics will release monthly employment figures on Wednesday, including the claimant count change, the ILO unemployment rate and average earnings.

The claimant count rate, a narrower measure of joblessness, is forecast to decline 30,000 in July, following a drop of 36,300 the previous month.

The unemployment rate is forecast to fall from 6.5 percent to 6.4 percent in the three months through June.

Average earnings excluding bonus are forecast to increase at an annual rate of 0.7 percent in the three months through June, unchanged from the previous period and less than half the rate of inflation.

The 0.7 percent rate is the slowest growth in pay since records began in 2001.
Including pay, the increase in wages in the three months through May was 0.3 percent, the lowest in five years. Economists forecast total pay including wages to decline 0.1 percent between April and June.

A report released yesterday by the Chartered Institute of Personnel and Development suggests wage growth will remain weak well into next year. The report, which is based on a survey of private sector employers, suggests median wages will grow only 2 percent over the next year, down from last year’s 2.5 percent pace.

Weak earnings growth is a sign the UK economy is still operating below capacity, which is compelling enough evidence for the Bank of England to keep interest rates at record lows for an extended period.

The central bank has been under pressure all year to consider lifting interest rates sooner rather than later. Analysts have questioned the need for continued stimulus in the face of a rapidly improving economy.

UK unemployment has declined 1.3 percentage points over the previous year, helping to fuel a broad-based, consumer-led recovery.

The latest slowdown in earnings growth supports the central bank’s view that recovery can continue without risking a large increase in inflation. With earnings growth at its lowest level in more than a decade, there is little evidence to suggest the labour market recovery has been a major source price pressure.

The BOE on Wednesday will release its quarterly inflation report, which sets out policymakers’ view of inflation in the near term. The report will steer expectations about when the central bank intends to raise interest rates, and could significantly impact the markets.

The BOE, which is forecasting 2.5 percent wage growth this year, is expected to keep rates unchanged until the first quarter of 2015.

The pound will be especially sensitive on Wednesday. Sterling has tumbled around 2 percent against the US dollar this month, as investors question the continual strength of the UK recovery against a faster pickup in the US economy.

Cable edged higher Tuesday, advancing 0.14 percent to 1.6818.

The pound was higher against the euro as German investor confidence tumbled to a 20-month low. The EURGBP declined 0.32 percent to 0.7947.

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