Deutsche Bank’s Chief UK Economist Sanjay Raja highlights further signs of weakness in the UK labour market, with falling HMRC payrolled employees, elevated redundancies and a higher unemployment rate. He argues that slack is likely to increase further, pushing the jobless rate higher. Raja expects the Bank of England to deliver two more rate cuts this year as wage growth moderates and CPI moves closer to target.

Slack rising as unemployment pressures build

"Today’s labour market data won’t do much to assuage fears that the jobs market remains weak. HMRC payrolled employees fell for a fifth consecutive month, with the January flash reading pointing to a 11k monthly fall. Redundancies remain elevated – as per the LFS data, tracking at 145k in the three months to Dec-25. And the unemployment rate edged up to 5.2% over the same period."

"These are worrying signs in the labour market. Rising employee costs have spurred a substitution from labour to capital. Youth unemployment hit a new high at 16.1% in the three months to December. The share of workers outside the labour market that want a job also remains elevated at 23% of the 16-64 aged economically inactive population."

"How high will the jobless rate go? Today’s data suggests there may be a little more room to go before we hit the cyclical peak in the unemployment rate. The single month jobless rate already sits at 5.4%. HMRC data suggests more redundancies are ahead. And almost every single survey points to limited hiring plans. This will put continued upward pressure on the jobless rate. Put simply, the jobs market remains stuck."

"For the Bank of England, today’s data will only add to market expectations that more rate cuts are coming. We stick to our basecase for two more rate cuts this year (and likely by summer). Talk of risk management considerations will only rise from here. And with wage growth moderating and CPI projected to drop closer to target by spring, we expect the MPC to shift its focus more towards kickstarting the labour market."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)