Wage growth is ‘too hot to handle’
Plus, Lloyds signs deal to finance UK buyouts, Warner Bros Discovery considers a split and why you can't cut your way to profitability in today's Off To Lunch
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The latest jobs and wages data paints a conflicting picture of the state of the UK economy that is likely to make the Bank of England’s upcoming interest rate decision even harder.
The figures from the Office for National Statistics (ONS) show that wage growth is cooling. Annual pay increases (excluding bonuses) slowed to 5.7 per cent in the three months to May, down from 5.9 per cent in April. Wages are now growing much slower than a year ago, when growth was 8.6 per cent. However, they are rising ahead of the rate of inflation.
That means real wage growth, which takes into account inflation, is on the rise. With inflation dropping to 2 per cent, real wage growth (including bonuses) is at 3 per cent. It was last higher in August 2021, when it was 4.5 per cent.
The forces that caused the cost-of-living crisis – that prices were rising faster than wages – has now been reversed. But few economists would argue that people are feeling better off, mostly down to higher mortgage costs.
This is further complicated by ONS data that points to a weakening in the job market. While unemployment remains unchanged at 4.4 per cent, the number of job vacancies fell by 30,000. As Liz McKeown, director of economic statistics at the ONS, points out, the medium-term trend shows that growth in the number of employees on the payroll is weakening and unemployment is gradually increasing.
All these figures leave the Bank of England with a tough decision to make. Inflation is at the bank’s target level but services inflation remains very high and there are concerns it could become sticky. The jobs market is weakening but real wage growth remains high.
Economists are betting that the slowdown in the jobs market won’t be enough to offset the strength of services inflation and could mean the Bank of England waits until at least September to make a cut. But, as Ashley Webb, UK economist at the consultancy Capital Economics, says, it is a “close call”.
The Resolution Foundation think tank describes wage growth as “still too hot to handle”, with pay packets proving “mighty resilient”. Meanwhile, Luke Bartholomew, deputy chief economist at the investment firm Abrdn, says the figures are a “double-edge sword” with the Bank of England likely to need more confidence that wage growth will slow further, though he does “just about” expect a cut in August.
The dilemma is best summarised by Pantheon Macroeconomics chief UK economist Rob Wood, who says: “Rate setters will breathe a sigh of relief after today’s labour market data, which leaves open the option to cut in August despite hot CPI services inflation. Rate setters will be encouraged by softer private sector pay growth in May, suggesting only small upside risks to their forecast for Q2 pay growth.
“We think an August rate cut is a very close call. The monetary policy committee could easily dismiss yesterday’s stronger-than-expected CPI services reading as volatile, just as they did in June, note slowing wage growth, and plough on with a rate cut in August. But we think services inflation is just too hot for the MPC to go ahead in August, and instead expect them to wait until September to reduce interest rates.”
Business Question
Who am I?
- Today is my 74th birthday
- I’m a knight
- I first dabbled in magazines
- I’ve written several best-selling books
- You know me from business but I created a non-profit called The Elders
- Balloons, planes, records and a Caribbean island play a key role in my story
The answer can be found at the bottom of the page.
Business in Brief
Everything you need to know
1. Lloyds Bank has partnered with Oaktree Capital Management, a credit investment shop, to finance UK buyouts. Oaktree will provide Lloyds’ clients with loans of up to £175m to fund private equity takeovers and refinance debt maturities. They hope to deploy £1bn over the next three years using both Oaktree’s credits funds and Lloyds capital. You can read more here.
2. Canary Wharf Group has unveiled its plans for 8 Canada Square, currently HSBC’s headquarters, as it looks to transform the building. The group says the renovation will include “best-in-class workspaces, leisure, entertainment, education and cultural attractions”. HSBC is moving to the Square Mile in 2027. The pictures are well worth a look. You can find them here.
3. Warner Bros Discovery is considering splitting its digital streaming and studio businesses from its legacy TV networks, according to reports. The Financial Times says the company is examining a number of strategic options in a bid to boost its share price. These also include selling off assets and spinning out its Warner Bros movie studio and Max streaming service. You can read more here.
4. The number of profit warnings by listed companies dropped in the second quarter to 49, down 26 per cent year on year and the lowest quarterly total since Q2 2021. However, cost pressures rose as a factor explaining profit warnings, cited in 27 per cent of them, while contract issues were cited in 29 per cent. You can read more here.
5. Big-ticket ad campaigns are on the way back as the UK economy continues to strengthen. Marketing budgets have experienced their largest rise since the first quarter of 2014, according to the quarterly Bellwether report from industry body the IPA. Total balance for main media budgets rose to 3.5 per cent in the second quarter. You can read more here.
Business Quotes
Inspiration from leaders
“Be an amateur. Not everything you do has to be good, especially at first.”
– Ann Handley
Business Thinker
Ideas on the future of business and leadership
1. ✂️ You cannot cut your way to profitability ✂️
2. ? The folly of certainty ?
3. ? The lost art of accomplishment without burnout ?
And finally…
How much would you pay to own the largest and most intact stegosaurus ever found? The fossil, nicknamed Apex, was found in Moffat County, Colorado – fittingly near the town of Dinosaur. It measures 3.4 metres tall and 8.2 metres long, making it 30 per cent larger than the second biggest and most intact stegosaurus ‘Sophie’, who is on display at the Natural History Museum.
It contains 254 fossil bone elements of the 319 paleontologists believe made up the stegosaurus skeleton. It shows no evidence of injuries or postmortem scavenging, although it does appear to have rheumatoid arthritis – suggesting it lived to an advanced age.
Apex was sold at auction this week to an anonymous bidder. The buyer reportedly said: “Apex was born in American and is going to stay in America.”
And the price? A record $44.6m (£34.3m).
The answer to today’s Business Question is Sir Richard Branson
