22 July 2026: UK unemployment steady at 4.9%, wage growth eases in May

The first sign of rancour over Andy Burnham’s unchallenged rise to the top of the Labour Party emerged yesterday, when former Chief Secretary to the Treasury and Starmer supporter Darren Jones told the BBC that Burnham’s first attempt to reduce the cost of living, the removal of VAT from domestic electricity bills, was unfunded, even though the Prime Minister had said it would be paid for by scrapping the national digital ID scheme.

While this is a relatively small financial cost to the Government, at around £750 million per year, and saves every household around one pound per week, it has provided a note of positivity around Burnham and his Cabinet. However, it also shows that Labour MPs do feel that they have been “railroaded” into agreeing to Burnham as their new leader.

Burnham will need to show that all the new policies he delivers have been, or will be, fully provided for by the Treasury and the new Chancellor John Healey.

The UK’s unemployment rate has remained steady at 4.9% over the three months to the end of May, according to data from the Office for National Statistics published yesterday.

While this is a 0.2% increase over the year, it represents a 0.1% fall compared with the previous quarter.

Elsewhere, the UK’s economic inactivity rate fell by 0.1 percentage points over the year and by 0.1 percentage points over the quarter, reaching 20.9%.

The number of paid employees fell by 0.3% (90,000) over the last 12 months to the end of May, and by 0.1% (30,000) over the quarter. The UK’s claimant count for June this year increased over the month but has fallen over the past year to approximately 1.689 million.

Wages grew by an average of 3.4% excluding bonuses and 4.3% including bonuses over the three months. Earnings growth excluding bonuses reached 5.5% over the year for the public sector and 2.9% for the private sector.

Burnham held his first Cabinet meeting yesterday, but as Parliament is currently in recess for the summer, he won’t have to face the rigours of Prime Minister’s Questions yet.

When Louise Haigh, then a lowly backbencher, wrote a policy prospectus for the left-wing Renewal journal in May, it contained a little-noticed nugget: a rethink of the Bank of England’s mandate.

Haigh, who quit as transport secretary in 2024 after it emerged she had been convicted of fraud over a missing work phone, is back in frontline politics as a linchpin of Andy Burnham’s operation. Economists are now asking whether the Bank, and the mandate it receives from the Chancellor to target stable prices alone, will be in the new administration’s sights.

Haigh wrote at the time: “As we approach the 30th anniversary of Gordon Brown giving the Bank operational independence to set interest rates, the time is right to re-examine the mandate and see whether better coordination and a greater focus on economic growth should also be included.”

While this does not bring the Bank back under Government control, a wish of President Trump for the Federal Reserve, widening its mandate would please many Labour Backbenchers who feel that the Bank gets a “comfortable ride” from the Treasury Select Committee, primarily due to its limited mandate.

The pound fell modestly yesterday, with markets showing a cautious tone around UK politics and a firmer US dollar backdrop. It reached a low of 1.3359 but recovered moderately to close at 1.3375

A Reuters opinion poll showed that the Federal Reserve may keep its key interest rates unchanged until the end of 2026, as U.S. inflation continues to exceed the target of 2%. This reinforces the central bank's direction towards maintaining a tight monetary policy until price pressures decline sustainably. This estimate comes at a time when investors are continuing to assess the trajectory of interest rates and their effects on the economy and financial markets.

According to the survey, all 104 participating economists expect the Federal Reserve to hold the interest rate within a range of 3.50% to 3.75% during its scheduled meeting next week, while three-quarters of the participants predicted no change in interest rates until the end of the year. Separate results also showed that the majority of economists are now viewing the chances of an interest rate hike this year as increased compared to last month, a shift that reflects growing concerns about the continuation of inflationary p, and the possibility of a full resumption of hostilities in Iran and the Arabian Gulf.

This shift is partly due to a nearly 25% increase in oil prices following heightened tensions in the Middle East, which raises the risk of U.S. inflation rising again after a recent slowdown. Oil is one of the factors affecting production and transportation costs, which may be reflected in the prices of goods and services and complicate the central bank's task of bringing inflation back to its target level.

Federal Reserve Chairman Kevin Warsh confirmed last week that the bank's priority remains to bring inflation back to 2%, although this goal has not been achieved for over five years. Several economists participating in the survey indicated that continued labour market stability and an unemployment rate near 4.2% give the central bank room to maintain current monetary policy if price pressures persist.

The results of the survey highlight the importance of U.S. inflation as the most influential factor in the Federal Reserve's decisions in the coming phase, as its future path will determine the timing of any changes in interest rates, something that markets are closely monitoring to assess its implications on borrowing costs, the bond market, the U.S. dollar, and economic activity in general.

President Trump has announced that, from Monday this week, an additional 50% tariff would be imposed on certain Canadian products, despite Canada being a close ally. The move came abruptly as the two countries prepared for renegotiations of the United States-Mexico-Canada Agreement (USMCA). Analysts suggest the Trump administration is once again igniting global tariff disputes, which began in April last year.

According to the White House, Trump signed an executive order imposing 50% additional tariffs on select Canadian goods, including wine, hockey sticks, and cement. The tariffs will take effect 30 days after the signing and are expected to affect approximately 20 billion dollars’ worth of Canadian imports. Last year, the U.S. imported 383 billion dollars’ worth of goods from Canada.

The new tariffs appear to be based on Section 338 of the Trade Act of 1930. This provision allows the President to impose tariffs on countries that discriminate against U.S. businesses. The White House stated, “This is a response to Canada’s discriminatory treatment of American products.” It claimed that Canada has pressured U.S. automakers to invest in local production and has imposed tariffs on American alcoholic beverages in some provinces. However, this is an unusual measure, as the provision has never been used to impose tariffs. The Wall Street Journal described it as “a little-known clause.”

The US dollar strengthened yesterday, as the Dollar Index (DXY) rose 0.17% to 101.16. The market will need to experience a significant economic or macroeconomic event to shake traders out of their “summer slumber”

It seems that 2.8% inflation is enough to justify an ECB pause, but not enough to end the debate. Three authoritative ECB sources point in the same direction: a pause is the most likely outcome, but energy and geopolitical risks mean the ECB cannot declare victory.

However, energy-driven inflation risks have re-emerged, so a hike is not completely off the table. Dutch bank ING notes that a “surprise hike” is possible if oil shocks worsen, though it still expects a hold.

The ZEW economic sentiment index for Germany surged to 26.3 in July, more than doubling from 10.5 the previous month and significantly exceeding the market forecast of 17.5, according to data released by the Leibniz Centre for European Economic Research (ZEW).

The comprehensive reform package in pensions, taxation, and labour, unveiled by Chancellor Friedrich Merz's administration, boosted investor confidence. The current conditions index also improved to minus 77.6 from minus 81.0, though it remains well into negative territory.

While some economists view this as evidence that the German economy may have bottomed out, concerns persist over geopolitical risks, particularly the situation in Iran and crude oil price volatility, which temper outright optimism about the recovery trajectory.

Merz’s government won praise for its reforms, as economists and business leaders viewed the package as substantial, credible, and finally decisive after months of political wrangling. The reforms were seen as a meaningful step towards reviving Germany’s sluggish economy and improving long-term competitiveness.

The package includes €10 billion per year in tax relief for lower-income earners and families, funded by raising the top tax rate from 45% to 47% for high earners, something that Andy Burnham may consider in the UK.

It builds on earlier proposals to add a capital-funded element to pensions and to gradually raise the retirement age, moves economists say could strengthen Germany’s long-term fiscal sustainability.

Analysts noted that the CDU and SPD, often at odds, managed to agree on one of the biggest reform packages in decades, signalling an unusual level of political seriousness amid rising pressure from the far-right AfD.

The Spanish Government has formally proposed Pablo Hernández de Cos, General Manager of the Bank for International Settlements and former Bank of Spain governor, as its candidate to succeed Christine Lagarde at the ECB.

Madrid is launching its first-ever bid for the Eurozone's top monetary job amid growing signs that Christine Lagarde will leave the European Central Bank earlier than planned, opening the succession race.

According to Spanish economic newspaper Expansión, which cites five sources close to the process, the Spanish government has chosen Pablo Hernández de Cos, general manager of the Bank for International Settlements and former Bank of Spain governor.

Contact between Hernández de Cos and the team of First Deputy Prime Minister and Economy Minister Carlos Cuerpo is regular, the sources say, and the mission to install the Spaniard in the presidential office on the 40th floor of the central bank's Frankfurt tower, where Lagarde sits until October 2027, has been in the works for months.

Hernández de Cos declined to comment, while the Economy Ministry said that Spain, as one of the Eurozone's largest economies and biggest ECB shareholders, naturally aspires to a major role in the institution's next phase and will present a candidacy to match when the moment arrives.

“The selection process hasn’t even begun yet. When the time comes, Spain will put forward a candidate who is up to the task, and we will provide an update. There’s still time," the ministry said in a statement.

Hernández de Cos' credentials are hard to dispute.

The Euro softened slightly yesterday, with EUR/USD slipping from 1.1415 to 1.1398 (–0.15%).

Markets leaned towards the dollar as Middle East tensions lifted oil prices and revived inflation-risk expectations, supporting demand for USD.

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