This morning’s update from the Office for National Statistics points to a cooling UK economy, with the unemployment rate rising to 4.6% in the three months to April and wage growth showing signs of easing.
For wealth managers, the shifting labour market dynamics raise fresh questions about the monetary policy outlook, the direction of gilt yields, and the resilience of UK consumer spending heading into the second half of the year.
Annual regular pay growth slowed to 5.2%—down from 5.5% a month earlier—and now stands at just 2.1% in real terms once inflation is taken into account. The number of job vacancies continued its steady decline and now sits around 60,000 below pre-pandemic levels.
Signs that labour cost pressures are beginning to ease
Danni Hewson, head of financial analysis at AJ Bell, said the latest figures reflect the long-expected drag of higher business costs—particularly employer national insurance hikes—feeding through into hiring behaviour and wage dynamics.
“Even before the increases to employer national insurance came into force, companies were paring back their hiring, trying to do more with fewer people,” said Hewson. “Now that those higher costs are baked in, many businesses are still cautious, especially with inflation-conscious consumers limiting pricing power.”
She also highlighted the impact of international uncertainty, particularly around US trade policy, which may have caused some firms to delay investment and recruitment decisions.
“Wage growth has fallen, though it is still outstripping inflation,” she added. “And today’s figures are already having an effect on market expectations around interest rates. While a cut next week remains unlikely, the softening in labour and earnings data has added weight to forecasts of a summer move from the Bank of England.”
Muted market reaction but the monetary policy picture shifts
David Morrison, senior market analyst at Trade Nation, noted that while the labour market is clearly cooling, some of the data must be interpreted with caution due to ongoing concerns about survey reliability. A redesigned Labour Force Survey is expected in 2027 to address these issues.
“Unemployment rose, vacancies fell by another 42,000, and pay growth slowed,” said Morrison. “But the drop in economic inactivity to 21.4% offers some tentative optimism.”
Market reaction was limited. Sterling dipped on the initial release but recovered quickly, and FTSE 100 futures added modest gains, continuing to trade close to all-time highs.
“The overall decline in pay growth should help the Bank of England as it navigates the timing of its next rate cut,” said Morrison. “But with underlying inflationary concerns still unresolved, it’s a delicate balancing act.”
Zara Nokes, Global Market Analyst at J.P. Morgan Asset Management (JPMAM) also focused on the Bank as she comments: “This morning’s data puts the Bank of England in an exceptionally challenging situation. The labour market is clearly deteriorating, with the unemployment rate ticking up and HMRC payrolls contracting by a sizeable 109,000 in May.
“However, with wage growth still-elevated and inflation spiking in April, the Bank will not want to jump the gun and take its foot off the brake too soon. One would expect price pressures to dissipate as the labour market falters, but until there is clear evidence of cooling inflation in the hard data, the Bank should stay firmly on hold.”
Charles Stanley’s Rob Morgan sees tilt toward rate easing
Rob Morgan, chief investment analyst at Charles Stanley, said the latest figures give the Bank of England’s more dovish Monetary Policy Committee members further justification for loosening monetary policy later this summer.
“The omens for the UK labour market are not great,” Morgan said. “Unemployment has now increased for two consecutive readings, and pay growth is softening. That strengthens the case for a rate cut in the coming months.”
He pointed out that the Bank has been internally divided on the best path forward. Some members, like Chief Economist Huw Pill, remain focused on persistently elevated wage growth as a long-term inflation risk. Others fear the economy may slow rapidly in the second half of the year, which would make further tightening a policy error.
“April’s data offers ammunition for the dovish camp,” said Morgan. “Wage growth remains above the Bank’s 2% inflation target, but there’s clear evidence of a slowdown now. If this continues alongside weakening vacancies and rising unemployment, the BoE will find it harder to justify holding off.”
NI and minimum wage changes may be distorting pay signals
Morgan also noted that April’s figures reflect, for the first time, the full impact of increases in both the National Living Wage and employer national insurance contributions.
“Those changes may have contributed to a ratcheting effect across wage structures,” he said. “As pay rises for lower earners, more senior staff expect differentials to be preserved—putting further upward pressure on payrolls, even as overall headcount falls.”
He suggested this could result in “sticky” nominal wage growth for a while, even as economic activity and hiring momentum slow—an important nuance for inflation forecasters and fixed income investors alike.
Implications for wealth managers and asset allocation
For multi-asset managers, the key takeaway is that the UK economy may be entering a softer phase, with wage and employment pressures starting to align more closely with the Bank of England’s policy targets. This may support gilts and duration exposure in the short term, especially if a summer rate cut becomes more likely.
However, persistently high nominal wage growth, even amid rising unemployment, could create a difficult environment for forecasting both inflation and policy shifts.
From a client perspective, a weaker labour market could weigh on consumption and sentiment, especially in sectors sensitive to discretionary spending. At the same time, the decline in vacancies and hiring may affect corporate earnings outlooks across mid-cap and small-cap UK equities.
Wealth managers will need to keep a close eye on household resilience, policy signals from the BoE, and how these trends interact with global monetary developments, particularly in the US and eurozone. With inflation cooling and the labour market now showing cracks, the case for a cautious, data-driven approach to UK allocations is strengthening.
