Cooling wage growth looks likely to pave the way for two more interest rate cuts this year.

Average weekly earnings in the three months to July were 5.1 per cent higher than a year earlier, according to the Office for National Statistics (ONS).

The earnings figures were followed this morning by data showing the Uk economy flatlining for a second month, with GDP growth at zero in July. Economists had expected 0.2 per cent growth after a pre-election stall.

Wage growth was the lowest increase for two years and marks a sharp slowdown compared with July last year when wages were growing by 7.8 per cent.

While the ONS said average regular earnings excluding bonuses were up 5.1 per cent, total earnings including bonuses was up 4 per cent. The latter figure is used for the state pension triple lock and should deliver a £460 annual rise for pensioners from April.

Experts said it should be enough to persuade the Bank of England to cut interest rates further this year – after a quarter point reduction from 5.25 per cent to 5 per cent in August.

Ashley Webb, UK economist at Capital Economics, said: ‘The further easing in wage growth will be welcomed by the Bank of England as a sign that labour market conditions are continuing to cool.’

However, few expect the Bank to go for another cut when its rate-setting Monetary Policy Committee meets next week. Instead, markets are betting on one quarter point cut in November and another in December. That would take rates to 4.5 per cent.

The slowdown in wages is less damaging to workers’ household finances than it might have been, because inflation has slowed sharply. Stripping out the impact of inflation, pay is rising by 3 per cent, close to three-year highs. 

And yesterday’s figures also revealed a rosier picture for the wider jobs market – further putting paid to Labour’s much-ridiculed claim that it has inherited the worst economic situation since the Second World War.

The ONS said unemployment dropped to 4.1 per cent, the lowest level since the three months to January. 

And employers added an extra 265,000 jobs in the three-month period, much higher than the 123,000 forecast by economists.

Kallum Pickering, chief economist at broker Peel Hunt, said: ‘This is a solid labour market report.’

The ONS figures also revealed a welcome decrease in the number of working age people classed as economically inactive – meaning they are neither working nor looking for work – from 9.4m to 9.3m.

However, the staggering figure is still close to record levels and represents more than a fifth of those aged 16-64.

It includes those who are signed off with long-term sickness, which is also close to record levels but has dropped for the third month in a row, to just under 2.8m.

Meanwhile, the number of job vacancies fell by 42,000 to 857,000 in the three months to August, the lowest level since June 2021 and a 26th month of decline.

Further evidence on the progress of the economy will be revealed today when the ONS publishes monthly growth data for July.