UK Reaction: Unemployment picks up whilst job growth remains firm
• Unemployment rate rose to 3.7% from 3.6%, in line with consensus expectations.
• Inactivity rate declined 0.2 percentage points (ppts) to 21.5% driven by 50-64s entering the labour market but still remains well above levels prior to the pandemic.
• Employment growth remains firm picking up over the quarter by 27,000 above consensus estimates of a 17,000 decline
• Wages beat expectations with average regular pay (excluding bonuses) rising by 6.1% (consensus 5.9%) and was driven by increases in public sector pay
• Clear evidence that slack is gradually emerging, but developments around wages will continue to unsettle Monetary Policy Committee (MPC). We expect 50 basis points (bps) hike on Thursday.
The October Labour Force Survey (LFS) data was mixed, with unemployment continuing to edge higher driven by declines in inactivity. At the same time, jobs growth remains robust and shows little sign of slowing considerably and wage growth continues to push higher driven by increases in public sector pay. We expect the MPC to hike Bank Rate by 50bps this Thursday.
The details: unemployment picks up but jobs growth remains firm
The unemployment rate for October 2022 rose by 0.1ppts to 3.7% from 3.6% in September and came in line with consensus expectations. Employment growth remains firm, rising over the quarter by 27,000 coming in above consensus expectations of a 17,000 decline, with the employment rate increasing to 75.6% (up 0.2ppts on the quarter). November’s HMRC payrolls figures point to continued strength in employment, with the number of payroll employees increasing by 107,000 on the month.
The economic inactivity rate decreased by 0.2ppts on the quarter to 21.5% – the first decline in inactivity in 5 months. Inactivity still remains well above levels prior to the pandemic when it stood at 20.2% (Dec-Feb 2020). The decrease in economic inactivity was driven by those aged 50 to 64 and looking at economic inactivity by reason, the quarterly decrease was driven by falls in those inactive because they are retired. We expect the unwind of the inactivity rate to continue easing some of the current tightness in the labour market, but the considerable rise in those who are inactive due to long-term sickness mean considerable uncertainty over the extent of a potential rebound remain.
Average total pay (including bonuses) rose by 6.1% and average regular pay (excluding bonuses) rose by 6.1% up from 5.8% in September, this came above consensus expectations of average regular pay growth of 5.9%. The upside surprise in wages was driven by rises in public sector wages which have remained subdued (up to 2.7% from 2.2%) whereas private sector wages remained at 7.0%. In real terms (adjusted for inflation), total and regular pay both fell by 2.7%; this decline is slightly smaller than the record fall in real regular pay seen in June 2022 of 3.0%, but remains among the largest falls in growth since records began in 2001.
Labour demand continues to show signs of cooling with the number of vacancies falling by 65,000 on the quarter (Sep-Nov 2022) to 1.18m, this marks the fifth consecutive quarterly fall in the number of vacancies. Despite the sustained falls, vacancies remain at historically high levels, over the 5 years preceding the pandemic (2015-19) vacancies averaged around 800k.
Slack emerging but is it enough?
There is evidence slack is emerging in the labour market slowly – and in our view will not be enough for the MPC to be confident that price pressures will not prove persistent, particularly as wage growth remains buoyant. Signs that labour supply which has remained constrained and added to labour market tightness is beginning to ease is positive but at this stage only initial. We continue to expect the MPC to hike Bank Rate by 50bps at their December meeting on Thursday. We also pencil in a 50bps hike in February and a further 25bps hike in March seeing rates peak at 4.25%. We also expect to see the MPC unwind some of these hikes as more slack emerges in the economy and labour market, pencilling one cut in Q4 2023 bringing rates to 4.00%.
Sterling briefly rose against the dollar and the euro following the release of the data, before retracing.