UK Reaction: Labour supply on the rebound
• Unemployment rate was unchanged at 3.7% in December 2022, in line with consensus estimates.
• Economic inactivity, which has picked up considerably since the pandemic, has shown signs of declining meaningfully. Economic inactivity declined by 0.3 percentage points (ppt) on the quarter to 21.4% – its third consecutive decline.
• Wage growth beat expectations (6.7% vs 6.5% consensus) but was driven in part by upward revisions to November’s figures. The single month figure has slowed considerably for private sector wages and the whole economy is showing signs of moderation.
• The labour market continues to show signs of some slack emerging driven by slowing demand for labour; the evidence is far from conclusive but signs of moderation in pay growth and an unwind in high inactivity will be welcomed. We continue to expect the Monetary Policy Committee (MPC) to hike Bank Rate by 25 basis points (bp) in March.
The UK unemployment rate was unchanged at 3.7% in December 2022 (consensus 3.7%). Employment increased by 74,000 over the last quarter of 2022, above consensus estimates of a 40,000 rise. This increase in employment was offset by more people re-entering the workforce, a much needed increase in labour supply.
The increase in employment seen over the quarter was driven by an increase in part-time employment (+106,000), whilst the number of people employed in full-time jobs fell (-73,000). The increase in part-time employment is likely driven by a need for more flexible employment as the economic outlook remains uncertain. The increase in part-time employment was driven by those who did not want a full-time job and those who were students or in school, and the number of people working part-time jobs as they could not find a full-time role declined on the quarter.
The economic inactivity rate declined to 21.4% and was down 0.3ppt on the quarter. Recent declines were driven by people returning to the workforce who were inactive because of long term sickness, studying and retirement. Economic inactivity rate remains well above where it stood prior to the pandemic (Dec-Feb 2020), with the economic inactivity rate 1.2ppt higher. The rise in inactivity is likely driven by a combination of factors including longer NHS waiting lists and those who have decided to retire early after building up savings during the pandemic. Over the last three quarters, we have seen inactivity fall indicating that this trend has begun to unwind meaningfully, but we continue to question whether we will see a full unwind of this trend.
Demand for labour continues to moderate with vacancies declining by 76,000 to 1.1m – their seventh consecutive quarterly decline. The level of vacancies is still high when compared to previous levels – vacancies are 1.4 times higher than they were just prior to the pandemic (Dec-Feb 2020) but firms continue to reduce vacancies reflecting uncertainty across industries, with economic pressures cited as a key concern for holding back on recruitment.
Wages beat market expectations driven by upward revisions to previous months data but showed some tentative signs of easing. Average earnings (excluding bonuses) rose 6.7% above consensus expectations of earnings at 6.5%, this came alongside upward revision to November’s wage figures to 6.5% from 6.4% prior. Private sector average earnings remained at 7.3% (following upward revisions to November’s data). The single month growth in average earnings (ex-bonuses) was 0.2%, whilst the single month figure tends to be volatile it has fallen to levels that over the longer term would be consistent with the Bank’s target for the first time in over ten months.
The labour market continues to show signs of some slack emerging driven by slowing demand for labour; the evidence is far from conclusive but signs of moderation in pay growth and an unwind in high inactivity will be welcomed. We expect the labour market to continue to cool this year with lagging declines in economic activity. We see unemployment rising steadily over 2023 averaging 4.5% in 2023, a considerable uptick when compared to current levels, but in line with the average rate of unemployment over the five years prior to the pandemic.
It’s clear that views on the path of further tightening amongst members of the MPC remain divided and we continue to see evidence of moderating labour market demand and buoyant wage growth fuelling this debate. We continue to expect the MPC to hike Bank Rate by 25bp at their next meeting driven by considerations of persistent inflationary pressures. We expect them to pause with rates at 4.25% and continue to see the first 25bp cut in Q4 2023.