Fewer jobs in July as economic slowdown continues

High borrowing costs and tax changes haven’t caused the UK jobs market to fall off a cliff edge, but it is showing continual signs of slowing, according to the latest labour market data from the Office for National Statistics (ONS).

The number of payrolled employees fell by 8,000 on a monthly basis in July according to early estimates – the sixth consecutive drop. The number of vacancies also fell by 44,000 over the past quarter (May to July). The unemployment rate is currently at a four-year high of 4.7%, unchanged from last month’s report.

ONS survey data suggests firms are not recruiting new workers or replacing those who have left. Businesses now have to pay higher National Insurance contributions and a higher minimum wage, which could be contributing to a more cautious approach. High borrowing costs and tariff uncertainty are also creating challenges.

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A slowing economy could open the door to further interest rate cuts, but the Bank of England has a tricky balancing act on its hands. At 3.6%, inflation is significantly above target and wage growth remains high, exerting inflationary pressure. Regular wages rose by 5% annually between April and June – the same rate as in the previous report.

Labour market loosening is a “slow grind”

While the jobs market continues to weaken, it is happening at a gradual pace. July’s estimated drop in payroll numbers is the sixth consecutive decline, but also the smallest in the series (down 8,000). For comparison, revised figures showed a drop of 26,000 in June.

“Today’s labour market report points to further evidence that the labour market loosening is not accelerating. It’s a slow grind,” said Sanjay Raja, chief UK economist at Deutsche Bank.

Survey data suggests it has further to run. “The recent KPMG/REC survey points to historically weak hiring plans and the Bank of England’s own decision maker panel suggests that employment growth in the next year is stalling,” Raja said.

More negative sentiment in the lead up to this year’s Autumn Budget will do little to help, with further tax hikes widely expected. The National Institute of Economic and Social Research (NIESR) recently warned that the government is on track for a £41 billion fiscal gap.

The Budget could be more focused on tax hikes for individuals this year, given the significant burden placed on businesses last time. However, rumoured policies like extending the freeze on tax thresholds will do little to boost consumer sentiment, which could have a knock-on effect on spending.

“The toxic combination of elevated living costs, high interest rates and frozen income tax thresholds is already squeezing household budgets,” said Alice Haine, personal finance analyst at investment platform Bestinvest.

“As more people are dragged deeper into the tax net as their wages increase, maintaining an existing lifestyle, saving effectively for short, medium and long-term goals, and tackling problem debts can feel like a challenge.”

In environments like this, households tend to focus on covering essential costs and building their emergency savings, which is generally bad news for economic growth.

When will the Bank of England cut interest rates again?

Policymakers cut interest rates to 4% earlier this month as the economy continued to slow, but it was a knife-edge decision. The Monetary Policy Committee (MPC) is clearly concerned about the persistence of inflation, which hit 3.6% in June.

The vote was far tighter than anticipated at 5-4 and required two votes to reach a verdict. As a result, some economists have adjusted their forecasts.

Before August’s meeting, Deutsche Bank was forecasting two cuts in the final quarter of 2025, expected in both November and December. It has now revised this to just one. It still thinks rates will ultimately settle at 3.25%, but not until the second quarter of 2026 rather than the first.

Financial institution ING is sticking to its call of one more cut this year and two more in 2026, but may need to rethink things if the next couple of inflation reports are hotter than expected.

Research provider Pantheon Macroeconomics doesn’t think we will see any further rate cuts this year.