The labor market in the U.K. cooled noticeably in the third quarter this year as the unemployment rate jumped and wage growth slowed, according to official data on Tuesday, which bolstered expectations for a Bank of England (BoE) interest rate cut next month.
The unemployment rate in the U.K. rose more than expected to 5% in the third quarter, the highest level since early 2021, the data showed.
The rate increased from 4.7% in the second quarter, the Office for National Statistics (ONS) said, ahead of the Labour government's annual budget due Nov. 26, which is set to feature tax rises amid weak U.K. economic growth.
Analysts' consensus forecast for the third quarter, running from July to September, had been for an increase to 4.9%.
Pay growth, excluding bonuses, on the other hand, slowed slightly to 4.6% in the three months to September compared with a year earlier, the ONS said.
That was in line with a Reuters poll of economists that mostly expected regular annual wage growth of 4.6% for July-September, slightly weaker than an increase of 4.7% in the three months to August.
A separate measure of payroll data provided by the tax office showed a 32,000 drop in October following a decline of the same size in September after a downward revision, noteworthy as more often the first estimate is revised higher. The two months combined marked the biggest such drop since late 2020.
"The number of people on payroll is falling, with revised tax data now showing falls in most of the last 12 months," ONS director of economic statistics Liz McKeown said in comments accompanying the latest figures.
The data deals a further blow to Prime Minister Keir Starmer's ruling Labour Party, which is trailing badly in popularity polls 16 months after winning a general election.
"There will be no pre-budget comforts that can be taken from today's employment data," noted Isaac Stell, an analyst at investment manager Wealth Club.
"Not only has the unemployment rate risen, but wage growth ... continues to shrink."
Stell added that "with speculation around the budget reaching fever pitch, businesses have postponed hiring and are less likely to commit to any form of investment until they know where the economic land lies."
The pound dropped against the dollar and British government bonds rallied, as the data aligned with the Bank of England's insistence on clearer signs of easing inflation pressure before proceeding with another rate cut.
Treasury chief Rachel Reeves, who is readying her Nov. 26 budget, will also be hoping for a further easing in borrowing costs, but will also be wary about a weakening jobs market.
"The UK labor market is weakening on all fronts," said Nye Cominetti, principal economist at the Resolution Foundation think tank.
The risk was that this turned out to be more than a blip caused by tax rises on employers that took effect in April, Cominetti added.
"The chancellor should aim to protect workers from more pain in her upcoming budget and avoid adding further costs to employers."
The Bank of England kept rates on hold last Thursday, but a narrow vote and signs that Governor Andrew Bailey might soon join those seeking a cut boosted the prospect of a move in December once the government's budget has been unveiled.
While the unemployment data are still subject to concerns over their quality, the figures nonetheless added to signs of a cooling labour market.
Other surveys published on Tuesday showed easing grocery price inflation and a weakening in consumer spending trends.
Wage growth excluding bonuses in the private sector, a key metric for the Bank of England, cooled to 4.2% in the three months to September, as the central bank had predicted in forecasts published at the start of the month.
It was the weakest reading since the three months to February 2021.
Interest rate futures on Tuesday pointed to 65 basis points (bps) of BoE rate cuts by the end of next year, up from 55 bps on Monday.
"Evidence of a further cooling in pay pressures removes one potential roadblock to a pre-Christmas rate cut as well as increasing the chances of further rate cuts in 2026," said Martin Swannell, chief economic adviser to the EY ITEM Club consultancy.
