UK Reaction: Unemployment shifts lower on shrinking workforce
• The Labour Force Survey (LFS) estimates for August showed the labour market remains tight. Unemployment fell to 3.5% - the lowest level since 1974 - despite employment falling over the quarter. Continued increases in economic inactivity added to upward pressure in the labour market.
• Labour demand continues to moderate. Vacancies (in September) declined for the third consecutive month, falling back by 46,000. Alongside survey data which continues to suggest hiring is slowing.
• Wage growth rose above consensus expectations, with average weekly earnings up by 6.0% (consensus 5.9%) and underlying wage growth (excluding bonuses) rose to 5.4% (consensus 5.3%).
• We think the strong labour market data continues to add to the case for the hawks, but the government’s fiscal plans will be central to the decision at the Monetary Policy Committee's (MPC) November meeting. We expect the Bank of England (BoE) to hike by 75 basis points (bps) but the risk of a larger move remains and will depend closely on whether the government is able to deliver a credible fiscal plan on 31 October.
The August LFS data showed the UK labour market remains hot and whilst labour demand is beginning to cool, constrained supply and rising inactivity is maintaining pressure. The unemployment rate decreased over the quarter to 3.5%, below consensus expectations of the rate remaining at 3.6%. This now marks the lowest level of unemployment since 1974. Even though the number of employed workers fell over the quarter, rising inactivity drove unemployment lower. The decline in unemployment continues to be driven by a sizeable increase in the number of people who left the workforce, with economic inactivity continuing to creep upwards. Economic inactivity rose to 21.7% from 21.1% and now stands 1.5 percentage points higher than it was prior to the pandemic (20.2% in Dec-Feb 20202).
Average weekly earnings (including bonuses) rose by 6.0% in the three months to August a touch above consensus expectations of a 5.9% rise. Key for the MPC is the underlying wage growth excluding bonuses (regular pay) which rose to 5.4% from 5.2% in July. Looking at the single month figure, between August and July wage growth rose by 0.1% compared to a 0.5% rise on the month in July. Despite some signs of moderation, the wedge between public and private sector pay continues to grow: average regular pay growth was 6.2% for the private sector and 2.2% for the public sector. Outside of the height of the pandemic period, this is the largest growth seen for the private sector and the largest difference between the private sector and public sector.
Timelier HMRC estimates of the number of payrolled employees show a 69,000 increase in September following last month’s rise of 71,000. The LFS employment figures posted a decline of 109,000 in the three months to August compared to the previous rise of 40,000, with employment declining for the first time since Feb 2022. Adding the mounting evidence that labour demand is beginning to cool, vacancies declined for the third consecutive month, falling back by 46,000.
Demand for labour continues to soften, but constrained supply of labour is still seeing the labour market tighten. We expect that increases in the inactivity rate will begin to unwind as some of those who have left the workforce during the pandemic return but the timing of this will be key for the MPC. For the MPCs November meeting, the impact of the government’s fiscal package will dominate. We currently expect the MPC to hike by 75bps, but this is a very close call between 75bps and 100bps. The Chancellor’s medium term fiscal plan and Office for Budget Responsibility projections which will published on 31 October will be key. If the Government is not able to set out a credible fiscal plan, we think the bank would be required to deliver a hike of 100bps or greater to calm markets.
Financial markets reacted to this morning’s data with moves also impacted by the announcement from the BoE that they would widen the purchases of long-dated gilts to include index-linked gilts. The pound fell against the dollar initially and has since retraced these losses trading at $1.104. The pound fell against the euro and is now trading at £0.880.