Deutsche Bank analysts warned Tuesday that Britain’s sharp payroll contraction in May signals mounting economic weakness, even as some labor market indicators show resilience. The bank’s assessment suggests the UK labor market is loosening faster than previously anticipated, with significant implications for monetary policy.
Alarming Payroll Data
The UK’s monthly payroll report revealed a staggering 109,000 job loss in May – the steepest decline since May 2020’s pandemic nadir. This follows April’s downwardly revised 55,000 drop, marking seven consecutive months of payroll contraction totaling 276,000 fewer employees. The private sector bore the brunt, shedding over 290,000 jobs during this period.
“This magnitude of payroll decline hasn’t been seen since the initial COVID shock,” noted Deutsche Bank’s UK economics team. “The persistence and scale of job losses suggest deeper structural issues in certain sectors.”
Mixed Labor Market Signals
While payroll data painted a grim picture, some alternative indicators showed relative strength:
- The Labor Force Survey (LFS) recorded 89,000 employment gains in April
- Self-employment increased by 13,000 since year-end
- Q1 2025 saw rising employee and self-employed counts compared to Q4 2024
Business sentiment also improved, with surveys like Lloyds’ Business Barometer and PMI data pointing to stronger output expectations and a slight uptick in employment indices.
Policy Implications
Despite these positive signals, Deutsche Bank maintains that labor market slack is building:
Unemployment Outlook: Expects UK joblessness to remain above the Bank of England’s equilibrium rate for the next year
Wage Growth: Projects private sector wage increases will undershoot expectations
Inflation Path: Sees core services inflation moderating as wage pressures ease
Rate Cut Forecast
These developments have led Deutsche Bank to anticipate:
- Multiple quarterly interest rate cuts beginning promptly
- Benchmark rate falling to 3.5% by year-end
- Terminal rate of 3.25% in Q1 2026 as wage growth aligns with the 2% inflation target
The bank’s analysts emphasized that “the payroll data tipping point increases pressure on the MPC to pivot toward accommodation.” They noted that while services inflation remains sticky, weakening labor market conditions should help bring price growth back to target.
This assessment contrasts with more hawkish BoE rhetoric, setting up potential market volatility as investors weigh conflicting signals about the UK’s economic trajectory. Deutsche Bank’s call for aggressive rate cuts reflects growing confidence that labor market cooling will effectively tame inflation without requiring prolonged restrictive policy.
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