The number of working-age people who were economically inactive, which means they were out of work not looking for work, reached its highest level since 2012 in December 2023 to February 2024. The number of people who are inactive because of long-term sickness increased to a record high of 7% of the working-age population.

With fewer people in work or looking for work, and relatively high job vacancies, there continue to be supply issues in the labour market. This is contributing to increased wages and wage growth falling more slowly than expected.

Inflation has also been falling more slowly than expected, and it is uncertain when the Bank of England will begin to cut interest rates.

Economic inactivity continues to rise

In December 2023 to February 2024, economic inactivity, the number of working-age people not in work and not looking for work, increased to its highest level since 2012. In this quarter 20.6 million people aged 16 to 64 were inactive (22.2% of the population), an increase of 275,000 people from the same time last year, and an increase of 850,000 people from before the start of the Covid-19 pandemic.

There was a sharp rise in inactivity following the start of the pandemic in 2020, and although inactivity fell in the second half of 2022 and the start of 2023, it has risen again over the last year.

People might be inactive because they are students, retired, stay-at-home parents or unable to work due to a disability or ill health.  However, the current continued rise in inactivity is being driven by an increase in the number of people who are unable to work due to long-term sickness. This has been rising since the summer of 2019 and reached a record high of 2.8 million people in December 2023 to February 2024, as shown in the chart below.

This meant that 7% of working age people were inactive in this quarter because of long-term sickness.

Economic inactivity due to illness had been between 2.0 and 2.3 million people between 2007 and 2021. It has since increased to 2.8 million.
Source: Office for National Statistics (ONS), INAC01 SA: Economic inactivity by reason (seasonally adjusted), 16 April 2024

Fewer people are in work or looking for work

The impact of the continued high levels of inactivity is that the proportion of people who are either in work or looking for work fell to its lowest level since 2015 in December 2023 to February 2024.

The number of job vacancies also remained relatively high, despite a fall in vacancies since spring 2022, and unemployment is historically low at 1.4 million people, reducing the number of people who might be able to fill vacancies.

With fewer people active in the labour market it is likely that vacancies will remain high. This would continue to put pressure on employers to retain staff due to concerns over whether they will be able to rehire.

The Office for Budget Responsibility (OBR) said in its March 2024 Economic and Fiscal Outlook that it expected a moderate rise in unemployment by the end of 2024.

Wage growth and inflation fall less than expected

These labour supply issues have contributed to the growth in earnings as employers increased salaries to retain staff. At the same time, pay rose to reflect the high inflation in 2022 and 2023.

Although the year-on-year growth in earnings has slowed, it remains high, as shown in the chart below. Average pay excluding bonuses was 6.0% higher in December 2023 to February 2024  than a year before, which was higher growth than economists had expected.

This was also the case for the UK inflation rate (the change in consumer prices over the past 12 months). Although there was a slight fall in inflation to 3.2% in March 2024, this fall was less than expected.

Consumer price index inflation increased sharply from less than 1% at the beginning of 2021 to a maximum of around 11% at the end of 2022. It has since fallen to around 3% at the beginning of 2024. Average earnings growth was around 3% before 2020, then fell to below 0% in 2020. It most recently peaked at around 8% in mid-2023, and has been falling since. It was just under 6.2% at the beginning of 2024.
Source: ONS time series KAC3 and D7G7

Will interest rates cuts be delayed?

Economists still expect that the Bank of England will cut its main interest rate, which has been at 5.25% since August 2023, by the end of the year.

As mentioned in last month’s economic update, the falling inflation early in 2024 led to a heightened expectation that the first rate cut could happen after the Bank of England’s Monetary Policy Committee policy meetings in June or August.

However, the higher-than-expected wage growth and inflation have increased uncertainty about when the first cut will be, and how many cuts there will be this year. According to Bloomberg, a business news publisher, most economists still expect the Bank of England to make its first cut in June, but that financial markets now expect there to be fewer cuts this year.

UK to return to economic growth next month?

There have been two successive monthly increases in GDP in 2024, making it likely that the UK will exit its ‘technical recession’ this year, although low economic growth remains a concern.

In February 2024 GDP was 0.1% higher than in January, following an increase of 0.3% in January. With other indicators improving from last year, it is likely that GDP will increase in the first quarter of 2024, and the UK will exit its technical recession, defined as two consecutive quarters of negative economic growth. The Office for National Statistics will publish the GDP estimate for this quarter on 10 May 2024.

Despite this, the extended period of stagnation that the UK economy is experiencing is expected to continue.

About the author: Andrew Powell is an economic researcher at the House of Commons Library.

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