UK labor market performance: Payroll employment fell by only 8,000 between June and July, with job vacancies generally lower than pre-pandemic levels. Private sector wages grew by 4.8% year-over-year, but momentum is weakening and could fall to 4% this year. Analysts are generally assuming a November rate cut, but hawkish communication makes decision-making highly data-dependent. If "stronger employment coupled with higher inflation" is considered, a rate cut could be delayed until early next year.



Labor market: Cooling but not disorderly
Between June and July, UK payroll employment fell by just 8,000, the eighth and smallest decline in the past nine months. Given the historical trend of upward revisions to payroll figures, a slight increase in the final July employment figures is possible. Business surveys conducted during the same period indicate a marginal improvement in hiring intentions following the spring "severe downturn," indicating that adjustments in labor demand are shifting from an acute phase to a more moderate rebalancing.

This coincides with two major shocks since April: a rise in national insurance, which increased labor costs, and a rise in the National Living Wage, which squeezed profits in low-wage-intensive industries. Coupled with demand rebalancing, job losses over the past 12 months have been primarily concentrated in service sectors like hotels and restaurants. Notably, the number of pre-notifications of large-scale layoffs received by the government has not increased significantly. Small and micro businesses are more likely to deleverage through natural attrition, reduced hours, and hiring freezes. This "quiet" contraction has mitigated the impact of unemployment on the macro economy, highlighting the "cooling without disruption" characteristic of the economy.

Wages and job vacancies: Key clues to easing stickiness. Structural indicators continue to weaken: Job vacancies in almost all industries are now below pre-pandemic levels, and the overall decline in vacancies has not slowed significantly. According to Indeed data, the decline in job vacancies in the UK is significantly greater than in the US, France, and Germany compared to pre-pandemic levels. Although the official unemployment rate has risen this year, its reliability has long been questionable, and cannot alone negate the directional judgment of a "loosening" trend.

The macro implication is that wage expansion momentum will continue to cool. The latest annual growth rate for regular private sector wages remains at 4.8%, but monthly momentum has clearly moderated. If the current trend continues, it is expected to fall back to 4% or lower this year. Regarding the inflation path, this means that cost pressures on services are expected to gradually ease, but subsequent data will be needed to confirm whether the transmission is smooth and whether businesses are delaying the actual impact of wage cuts by raising prices to maintain profits.

Policy Path: A November rate cut is the baseline, but data constraints are in place. Given the combination of marginal weakening in employment without a systemic deterioration, a continued decline in job vacancies, and easing wage stickiness, analysts believe the Bank of England has room to cut rates in November without sacrificing the credibility of its inflation target. This constitutes the baseline scenario. However, the hawkish tone of last week's meeting has increased reliance on subsequent data, suggesting policymakers are awaiting clearer confirmation of wage and services inflation.

If the combination of "better-than-expected employment improvement and higher-than-expected inflation" materializes, policymakers may hold off on rate cuts in November, pushing interest rate cuts to early next year. Conversely, if wage and service inflation continue to decline, the window for rate cuts will become more secure. For traders, the source of policy uncertainty is shifting from "direction" to "pace," increasing the importance of timing.