UK unemployment makes further strides: economists react

The UK’s unemployment rate unexpectedly dropped at the start of the year, falling from 4.8 per cent 4.7 per cent in the three months to January.

The figures underscore the strength of the UK economy in generating jobs and keeping unemployment contained since the financial crisis, also helping employment swell to the highest level since 1975, according to the Office for National Statistics.

But in more worrying signs for the health of Britain’s consumer-driven economy, weekly wage growth moderated to its slowest pace since April 2016 at 2.2 per cent.

With the UK poised to trigger its EU exit talks next month, here’s what analysts and economists are making of the health of the labour market.

Kallum Pickering at Berenberg notes that high vacancy rates at UK companies suggest there is still room for unemployment to drop further, albeit at a slower pace:

If the economy can sustain a sufficient level of real output growth amid Brexit risks, firms’ labour demand should remain strong. The continued high level of vacancies supports this view.

If wage growth remains subdued because firms can find the workers to fill the vacancies, and the unemployment rate falls much lower than expected, that is good news. In such a scenario, although the acceleration in wage growth would take more time to come through, the total level of employment would be higher. That is undoubtedly a good thing.

But if, as the broader trend over the last year indicates, employment gains are slowing despite high vacancies, then workers wage bargaining power will begin to increase and nominal wage growth can begin to accelerate.

Despite the dip in wage growth, Scott Bowman at Capital Economics expects the tight labour market to push up earnings in the months ahead:

The rise in employment was driven by self-employed workers and government training jobs rather than employees. But the increase meant that the annual growth rate held steady at 1% and surveys of firms’ employment intentions suggest that a similar rate to this will be maintained in the next few months.

We think that this labour market tightness will result in a rise in nominal average earnings growth over the coming months and, therefore, real wages should avoid significant falls.

What’s more, ongoing increases in employment and rock-bottom interest rates will probably support overall household disposable incomes, preventing consumer spending growth from slowing too much this year.

But analysts at Fathom are less sanguine on workers’ bargaining power, noting:

Considering that surveys suggest consumers expect high inflation, weak nominal wage growth suggests that workers may be willing to accept weaker pay settlements in favour of job security.

We maintain the view that it is ‘pain deferred’ not ‘pain avoided’ for the UK. Despite the labour market quantities data, the prices data and a growing number of other indicators suggest that a slowdown is on the way.

Chris Williamson at Markit also strikes a more cautious tone as he forecasts record levels of employment will begin to tail off this year:

Survey responses indicate that the overall rate of employment growth remains far below that seen on average in the previous three years, as firms’ appetite to take on extra staff has waned in the face of growing uncertainty about the economic outlook.

This uncertainty is widely linked to Brexit, with the government’s imminent invoking of Article 50 focusing attention on the reality of the UK leaving the EU.

The additional concern is that the combination of record employment (at 74.6%, the employment rate is the joint highest since recorded began in 1971) and weakening pay growth raises further questions about the quality of the jobs that are being created.

Sam Hill at RBC thinks today drop in unemployment will not trouble doves at the Bank of England that inflationary pressures are rising after the BoE lowered its estimate for the “neutral” level of UK unemployment from 5 per cent to 4.5 per cent.

Part of the MPC’s rationale for lowering the neutral unemployment (UE) rate was that pay growth had been weak, despite slack being absorbed by employment gains, as illustrated again by this latest labour market report.

Essentially, the MPC got itself in front of this development last month by finding more labour market slack as a result of adopting the lower neutral UE rate.

So, together with political developments pointing to the imminent triggering of Article 50, a lack of inflationary pressure in the labour market means it is unlikely the MPC [will] signal a change of tone from its ‘neutral’ mode either this week, or indeed at the May Inflation Report.

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