New data released by the Office for National Statistics (ONS) this morning offers fresh evidence that the UK economy is beginning to cool, with unemployment climbing and wage growth easing. For financial advisers, the implications for interest rates, inflation, and client sentiment could be significant as the market recalibrates its expectations for monetary policy through the summer.
The UK unemployment rate rose to 4.6% in the three months to April, marking the second consecutive increase. Meanwhile, annual pay growth slowed to 5.2%—or 2.1% when adjusted for inflation—adding to signs that the red-hot labour market of recent years is finally losing steam.
According to Danni Hewson, head of financial analysis at AJ Bell, the picture reflects employer caution in the face of rising costs and economic uncertainty.
Businesses were clear and vocal following last year’s Budget. They said increased labour costs would impact their ability to recruit new staff, and the latest official jobs figures show the number of vacancies has fallen to almost 60,000 below pre-pandemic levels and unemployment is up, said Hewson.
She noted that even before employer National Insurance increases took effect, many firms were already paring back recruitment, instead choosing to stretch existing resources while assessing their ability to pass on costs to inflation-weary customers.
Hewson also pointed to international pressures, such as US trade policies, which may be prompting some businesses to delay investment decisions, compounding domestic headwinds.
Wage growth has fallen, though it is still outstripping inflation, she added. Today’s figures are already impacting market expectation when it comes to rate cuts. The softening in the labour market and cooling wage increases have added to expectations that the MPC will deliver another cut later in the summer.
Vacancies decline while data reliability raises questions
The broader backdrop suggests a more fragile economic environment than earlier in the year, despite positive Q1 GDP figures. David Morrison, senior market analyst at Trade Nation, highlighted a continued downward trend in vacancies and a drop in economic inactivity, which fell to 21.4%.
The market reaction was muted, Morrison said. Sterling pulled back initially, before buyers came in to push it back up. FTSE 100 futures added a few points and continue to hover around all-time highs.
However, Morrison also cautioned that ONS data reliability is an ongoing concern due to lower survey response rates. A revamped Labour Force Survey is expected in 2027 to address these issues.
While the labour market is cooling, the decline in inactivity offers some optimism. However, caution is advised due to data concerns, Morrison warned.
Bank of England faces fresh pressure amid divided opinions
For advisers keeping a close watch on the Monetary Policy Committee (MPC), today’s numbers could shift the internal debate on interest rates.
Rob Morgan, chief investment analyst at Charles Stanley, sees the jobs data as lending weight to the more dovish members of the MPC.
The omens for the UK labour market are not great, Morgan said. There are now signs that pay is rolling over too. April’s figure shows a significant easing to 5.2% from 5.5% a month earlier, which makes it a little more likely the Bank of England will gain the confidence to cut interest rates again in the coming months.
Morgan described the current MPC dynamic as a dilemma, with some members—such as Chief Economist Huw Pill—urging caution over wage inflation, while others worry more about a potential sharp downturn in the second half of the year.
April’s jobs data offers some ammunition for the camp looking to cut earlier, Morgan added. There is now clear evidence of a slowdown in pay awards, which combined with other employment trends weakening further, could tilt the balance towards easing.
Employer national insurance changes may be distorting wage trends
Another layer to the current wage and employment story is the impact of changes to minimum wages and employer national insurance, which took effect earlier this year.
Morgan noted that while these changes may have helped lift pay levels for lower earners, they could also be having a ‘ratchet effect’—with more senior employees expecting commensurate rises, prompting employers to raise pay selectively while reducing headcount.
We could see a continuation of quite sticky wages while unemployment continues to rise, said Morgan. Though the effect should wear off relatively quickly.
For advisers, the implications of a slowing labour market are multi-faceted. While cooling wage growth may ease inflationary pressures and bring interest rate cuts into view—a potential boon for bond and income strategies—the increase in unemployment could weigh on consumer confidence and discretionary spending.
Clients may benefit from tactical reallocations or a review of cash buffers, particularly if signs of economic strain continue into the second half of the year. Advisers will also be watching next week’s Bank of England interest rate decision, as the central bank balances fragile growth against persistent inflationary risks – as well as tomorrow’s Spending Review – for more insight into what’s going on in the UK economy.
