UK labour market weakens as Budget uncertainty bites
The labour market is showing renewed signs of weakness, suggesting that the real economy is starting to feel the chill of fiscal uncertainty ahead of the November Budget. With pay growth slowing and job losses picking up, the latest data strengthen the case for the Bank of England to cut interest rates next month.
Employment falls at fastest pace since late 2020
Payroll employment fell by nearly 32,000 in October, following a similarly sized decline in September. Taken together, this marks the sharpest two-month drop since late 2020, when the economy was still grappling with the effects of the pandemic.
At the same time, the Labour Force Survey (LFS) unemployment rate rose to 5% in Q3, its highest level in more than four-and-a-half years, up from 4.7% in the previous quarter. The LFS has suffered from response-rate challenges, but improvements in that area means the official measure now offers a more credible signal that the jobs market is losing momentum.
Vacancies stabilise, but at a low level
Not all the news is bleak. The downward trend in job vacancies appears to be stabilising - openings rose slightly in the three months to October, the first increase in over three years. However, this recovery remains fragile: vacancies are still 13% below pre-pandemic levels, and the unemployed-to-vacancy ratio is now the highest since 2021.
Business surveys point to a modest easing in hiring caution among employers. But with demand softening, the overall outlook for labour demand remains subdued heading into winter.
Pay pressures continue to cool
The latest data also confirm a clear deceleration in wage growth. Private-sector regular earnings rose 4.2% year-on-year in the three months to September - the weakest rate since early 2021 and exactly in line with the Bank of England’s latest projections (Figure 1).
Figure 1. UK regular pay
That marks a notable step down from growth of almost 5% just three months ago. As late-2024’s strong pay growth falls out of the annual comparison, wage growth is likely to dip below 4% by year-end. Slower pay increases will help ease inflationary pressure but may also constrain household spending power heading into 2026.
Budget risks loom for employers and households
The upcoming Budget on 26 November adds a new layer of uncertainty for the jobs market. With fiscal headroom exhausted, Chancellor Rachel Reeves will almost certainly raise taxes, though she is more likely to target earners than businesses this time.
Still, the combined effect of higher taxes and slower pay growth could dampen household demand and weigh on consumer-driven sectors.
What It Means for Business
For employers, this shifting macro environment presents both risks and opportunities:
Growth in labour costs is easing, reducing pressure on margins in wage-sensitive industries such as construction, retail, and hospitality.
However, softer demand and tax uncertainty may temper recruitment plans and stall new investment.
Businesses reliant on discretionary consumer spending should prepare for a cautious Christmas period, as real incomes remain under pressure despite falling inflation.
Firms with strong balance sheets and access to finance could benefit from lower interest rates through 2026, unlocking growth and investment opportunities.
Our Take
The latest jobs data underscore a familiar pattern in economic cycles: policy uncertainty first hits business confidence, then hiring, and finally pay. While the stabilisation in vacancies hints that the worst may soon be over, the broader picture remains one of a cooling labour market.
We expect the Bank of England to deliver a rate cut in December, with more to follow through 2026. That should help stabilise hiring and consumer confidence, provided fiscal policy does not tighten too sharply.
The key question for 2026 will be whether the UK can pivot from policy restraint to policy coordination: monetary easing and fiscal discipline working in tandem, rather than at cross-purposes, to restore growth momentum.
