(Bloomberg) — Britain’s jobs market, which fueled inflationary pay raises immediately after the pandemic, is cooling sharply with the first increase in unemployment since July.
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Official data showed all indicators in the labor market are now pointing down, easing upward pressure on wages and reducing the number of vacancies. Companies also let more staff go, doubling the redundancy rate since October.
The figures indicate a difficult backdrop for Prime Minister Rishi Sunak’s government, which intends to seek reelection later this year. With the economy in recession in the second half of last year and job opportunities drying up, Conservative lawmakers are pressing for measures that make voters more confident in the prospects for the economy and their finances.
“We expect the labor market to weaken in the coming months, which should reduce momentum in wage growth and raise the prospect of interest rate cuts from the summer onwards,” said Yael Selfin, Chief Economist at KPMG UK.
What’s bad for Sunak will be greeted with relief at the Bank of England, which is seeking to slow demand in the economy and take the heat out of upward pressure on prices. Investors saw the data as a sign that that policymakers could soon lower interest rates for the first time since the pandemic.
The pound fell after the report, with sterling 0.1% weaker at $1.2801 and headed for a second day of losses. The currency had rallied to an eight-month high of $1.2894 on Friday, on signs the nation’s economy is holding up better than expected, potentially keeping interest rates higher for longer.
Traders stepped up bets on lower borrowing costs, fully pricing in four quarter-point reductions in the key rate over the next year. The Monetary Policy Committee is expected to make no change at its next meeting on March 21, holding the key rate at a 16-year high of 5.25%.
“These data will make the debate on the MPC more balanced,” said Tomasz Wieladek, chief European economist at T. Rowe Price. “There is now evidence that the labor market data have stopped going in the wrong direction. The labor market has been clearly tightening until this print this morning.”
BOE rate-setters are moving cautiously toward cutting interest rates from a 16-year high of 5.25%. They’re watching wage settlements for April closely, since many workers receive their latest pay rise then.
What Bloomberg Economics Says …
“The faster-than-expected fall in private sector wage growth supports our view that the Bank of England will ease policy this year and probably by more than markets expect. We also think that if inflation remains on track to drop below 2% in the spring, there’s a case for rate cuts to start in May. Still, we recognise that recent communication has suggested the BOE is in no hurry to ease policy, which could mean the first move down comes a little later, in the summer.”
—Ana Andrade and Dan Hanson, Bloomberg Economics. Click for the REACT.
The jobless rate rose to 3.9% in the three months through January, an unexpected increase from 3.8% in the quarter to December, the Office for National Statistics said Tuesday.
The ONS urged caution in using the figures on employment, unemployment and inactivity after problems in the labor force survey that feeds the figures. The survey was suspended in October due to falling response rates and only reinstated last month when the ONS published re-weighted numbers based on new population estimates. With work to improve the data ongoing, economists are putting less weight on their reliability.
All other figures in the report today pointed downward. Those included:
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Average earnings growth excluding bonuses fell to 6.1% in that period from 6.2% — a fifth straight decline. Companies stepped up the pace of job cuts.
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The redundancy rate rose for a third month to the highest since 2021. It more than doubled since October to 4.6 per thousand people, with 133,000 losing their jobs in the three months to January.
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Vacancies fell 43,000 on the quarter to 908,000 in period through February, the 20th consecutive decline from a peak around 1.3 million in 2022.
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The number of inactive people, neither in work nor looking for a job, fell by 28,000 to 9.25 million in the three months to January compared with the quarter to December.
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Employment was little changed, and the count of those classed as unemployed rose by 38,000.
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There were another 203,000 days lost to industrial action, the highest since September last year. The ONS said strikes among health and social care workers were largely responsible.
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Payrolled employee data based on administrative returns also showed wage growth slowing, while a 20,000 rise in employment in February masked declines in sectors such as manufacturing and retailing.
While the current levels of pay growth remain above the rate the BOE says is compatible with its 2% inflation target, the latest data increase the sense that the indicator is moving in the right direction.
The “downside wage growth surprise will raise MPC confidence that inflation pressures are fading,” said Rob Wood, chief UK economist at Pantheon Macroeconomics.
Workers on the National Living Wage will also get a pay boost of almost 10% in April, increasing staff bills for many businesses. A recent survey by the BOE suggests that firms expect pay rises of more than 5% over the next 12 months.
Markets have pushed further into the future their expectations for when the BOE will deliver its first rate cut since the start of the pandemic. Investors now have fully priced in a cut in August, three months or more later than anticipated at the start of the year. The BOE will give an update of its thinking next week, when economists expect no change in rates.
“The latest UK jobs report is slightly dovish for the Bank of England,” said James Smith, developed markets economist at ING. “We think the BOE will, at a minimum, want to see the April and May CPI reports, the latter of which won’t be available until the June meeting.”
–With assistance from Andrew Atkinson, Isabella Ward and Harumi Ichikura.
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