UK reaction - Labour market tightening continues
- Employment growth slowed to +42k 3m/3m to June 2018, the softest in 8 months.
- Unemployment fell to a new 43-year low of 4.0%, with broader measures of unemployment also trending lower – suggesting ongoing tightening.
- Headline pay growth slipped a little with falling bonus payments in most sectors of the economy in June.
- Underlying pay trends appeared firmer across the board.
- We continue to expect a tighter labour market to generate modest wage and unit labour cost acceleration over the coming years, adding to domestic inflation pressures.
- The BoE will see signs of justification for the recent interest rate hike in today’s report, but will happily sit out from further tightening until after Brexit.
Employment growth in the 3-months to June rose by +42k, softer than the 93k consensus and the slowest employment growth seen since last August, when employment growth fell. However, we are wary of placing too much weight on the quarterly estimates and view this softening in the context of +197k growth recorded in Q1. Together employment growth rose by an annualised 1.5% in H1 2018 – a solid expansion rate. That said, this quarter’s reading also suggested a material shift in part-time workers, with full-time workers rising by 105k and part-time workers falling by 64k. The number of part-time workers that could not find a full-time job fell to its lowest proportion since February 2009 at 11.7%.
Despite slower employment growth, the unemployment rate dropped to 4.0% (consensus 4.2%) to set a new record low, since 1975. This reflected a 65k fall in unemployment in Q2 2018, including a 23k drop in the economically active population, with economic activity rising by 77k in the latest quarter driven by an increase in students, long-term sick and ‘others’. This modest withdrawal from the labour force highlights the uncertain difference between ‘unemployment’ and genuine economic slack (as withdrawn labour may re-enter the workforce in the coming months or quarters). However, broader measures of unemployment continue to trend lower. We calculate an equivalent to the US ‘U6’ measure of unemployment, including part-time workers that want a full-time job and ‘economically inactive’ people that want a job. This broader measure of unemployment fell to 11.2% in Q2, lower than the lows of the last cycle. On most measures the labour market appears to continue to tighten.
Earnings growth was mixed. The headline earnings growth dipped to 2.4% (3m yoy) from 2.5% last month (consensus 2.5%). This reflected sharply lower bonus payments in June in most economy subsectors. However, in June annual earnings growth excluding bonuses rose to 2.8%, reversing softer growth in the previous two months. This reflected a sharp rise in public sector pay growth (to 2.5% from 1.8% last month), while private sector pay growth remained at a solid 2.9%. We continue to forecast a modest acceleration in wage growth over the coming two years as the labour market continue to tighten.
Today’s labour release will do little to influence the outlook for monetary policy. The release continues to point to a tighter labour market, albeit with some caveats around extracting trends from the higher frequency data. Our outlook is broadly consistent with the BoE’s latest projections for an acceleration in wage and unit labour cost growth over the coming years. Moreover, the relative softness of economic expansion (0.2% and 0.4% in recent quarters) has not stopped the labour market tightening further, which attests to the BoE view that the UK’s potential output growth rate is materially lower than before the crisis. To our minds this justifies the recent increase in interest rates to 0.75%. It is also likely to require ongoing tightening, modestly in excess of current market expectation over the coming years (we pencil in two hikes next year and one in 2020). However, the immediate future will be dictated by the path of Brexit as much as anything else, and we expect the BoE to now happily sit on the side-lines monitoring developments until after the UK leaves the EU (which we expect in March).
Accordingly, financial markets were broadly unchanged on today’s release. 10-year gilt yields eased back to 1.27% and sterling was modestly softer to the US dollar, modestly firmer to the euro.
Notes to Editors
All data sourced by AXA IM as at 14 August 2018.
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