UK real-term wages fall 2.7% and unemployment rises amid bleak economic outlook

Jobless rate up to 3.6% in three months to September while vacancies fall for fifth time in a row

A picket line at the Royal Mail Whitechapel Delivery Office in east London. The ONS says pay is the most common form of dispute between workers and employers. PA

Britain's pay packets shrank in the three months to September as employers worried about the outlook for the economy, Office for National Statistics figures have shown.

After taking inflation into account, average pay excluding bonuses fell by 2.7 per cent year-on-year over the July to September period. It dropped by 2.6 per cent when bonuses were included.

Excluding inflation, average weekly earnings excluding bonuses rose 5.7 per cent from a year ago, the most since August 2021, adding to inflationary pressures that are concerning the Bank of England.

The rate of UK unemployment rose to 3.6 per cent over the same period, up from 3.5 per cent in the previous three months, the ONS said.

Policymakers are seeking to head off a wage-price spiral after consumer prices jumped 10.1 per cent, the most in four decades. It comes as workers in many industries ballot for strike action, with rail and postal workers already walking out.

Jeremy Hunt, Chancellor of the Exchequer, said the figures represented strength in the UK economy but noted that fighting inflation was an increasing priority.

“Unemployment remains near record lows — providing security to families and testament to the resilience of the British economy, even in the face of severe global challenges,” Mr Hunt said. “I appreciate that people’s hard-earned money isn’t going as far as it should.”

The number of people in work fell by 52,000, more than the median forecast in the poll for a 25,000 drop.

The squeeze in the labour market has been fuelled by the loss of more than 500,000 workers in the past two years. Inactivity — those neither in work nor looking for a job — rose again to 21.6 per cent of working-aged adults from July to September. That left the number of people inactive since the pandemic at more than 600,000.

Darren Morgan, director of labour and economic statistics at the ONS, said: “The proportion of people neither working nor looking for work has risen again.

“Since the onset of the pandemic, this shift has largely been caused by older workers leaving the labour market altogether but in the most recent quarter the main contribution has actually come from younger groups.

“August and September saw well over half a million working days lost to strikes, the highest two-month total in more than a decade, with the vast majority coming from the transport and communications sectors.

“With real earnings continuing to fall, it’s not surprising that employers we survey are telling us most disputes are about pay.”

He added: “Job vacancies continue to fall back from their recent peak, with increasing numbers of employers now telling us that economic pressures are a factor in their decision to hold back on recruitment.

“The biggest driver behind the fall came from hospitality, followed by retailing and wholesaling.”

Mr Hunt said on Tuesday that lowering government debt was the only option to reduce inflation.

"Tackling inflation is my absolute priority and that guides the difficult decisions on tax and spending we will make on Thursday," he said, referring to his imminent budget statement.

"Restoring stability and getting debt falling is our only option to reduce inflation and limit interest rate rises."

On Thursday, Mr Hunt is expected to raise taxes and slash public spending, signalling a return to austerity despite millions suffering a cost-of-living crisis in an economy facing recession.

Prime Minister Rishi Sunak, who took office only three weeks ago, has vowed to fix the economic havoc created by his short-lived predecessor Liz Truss.

But he is mindful of skyrocketing energy bills, decades-high inflation and rising interest rates that are affecting households adversely.

Mr Hunt will present his crucial budget in Parliament, alongside official economic and inflation forecasts, with recent data indicating a grim outlook.

He is expected to unveil cost-saving measures of between £50 billion and £60bn ($58.7bn and $70.5bn).

"We're all going to be paying a bit more tax, I'm afraid," Mr Hunt said, likening himself to the penny-pinching miser Ebenezer Scrooge in Charles Dickens's festive favourite A Christmas Carol.

"We will be asking everyone for sacrifices," he said, stressing however that the pain would fall disproportionately on those better off.

In more gloomy news, Britain's economy shrank in the third quarter as inflation soared, likely confirming it was already in recession.

The Bank of England has said the UK economy would also contract in the current final quarter, meaning the economy was in recession which it warned could last until mid-2024.

Alice Haine, personal finance analyst at DIY investment platform Bestinvest, said: "Britain’s real wages — the purchasing power of worker pay after factoring in inflation — took another blow in the three months to September, with the personal finance misery set to worsen this week.

“It seems there is little to cheer about for workers at the moment, who are not only having their disposable incomes dented by higher prices on the goods and services they consume, but also soaring borrowing costs and the prospect of a two-year recession that has probably already started.

“With spending power now severely compromised, workers have the added worry of what Thursday’s budget will deliver with Mr Hunt widely expected to freeze a raft of tax allowances and thresholds as he looks to plug a black hole in the public finances — moves that could see more people pulled into the tax net or higher tax bands as a result."