UK Reaction: Wages cool as job growth remains firm
• Unemployment rate was unchanged at 3.7% in January 2023, below consensus estimates of a rise to 3.8%.
• Economic inactivity continued its decline but was offset by continued strength in employment. Employment rose by 65,000 over the quarter, above consensus estimates of a 52,000 rise and HMRC payroll figures point to continued strength.
• Wage growth has shown clear signs of slowing, average earnings (excluding bonuses) edged lower to 6.5% from 6.7% prior and came below consensus estimates of an easing to 6.6%.
• This labour market print has been mixed with pay data pointing to some easing and continued strength in jobs seeing labour market pressures remain. We continue to expect the Monetary Policy Committee (MPC) to hike Bank Rate by 25 basis points (bps) next Thursday but developments between now and then remain key: developments in global financial markets, tomorrow’s Spring Budget and next week’s February consumer price index (CPI) print.
The UK unemployment rate was unchanged at 3.7% in January 2023 (consensus 3.8%) as economic activity continued to rise but was offset by continued strength in employment. Employment rose by 65,000 over the quarter, above consensus estimates of a 52,000 rise. The more timely HMRC payrolls figure signalled continued strength in employment, rising by 98,000 on the month in February 2023.
The increase in employment seen over the quarter was driven by an increase in part-time employment (+89,000) and self-employment (+92,000), whilst the number of people employed in full-time jobs fell (-144,000). We continue to see the increase in part-time employment as being driven by a preference by employers for more flexibility as the economic outlook remains uncertain. The increase in part-time employment was driven primarily by those who did not want a full-time job, but we have also seen a small uptick in those working part-time either because they could not find a full-time job or because they are ill or disabled.
The economic inactivity rate declined to 21.3% and was down 0.2 percentage points (ppts) on the quarter. Recent declines were driven by people returning to the workforce who were inactive because of studying and retirement, but the number of people who are inactive because of long-term sickness continues to rise. Overall, the economic inactivity rate remains 1.1ppts above where it stood prior to the pandemic (Dec-Feb 2020), but we have begun to see a consistent decline in inactivity over the last four quarters which has contributed to some easing of labour market pressures.
Labour demand continues to moderate with vacancies declining by 51,000 in the quarter to February 2023 to 1.1 million – their eight consecutive quarterly decline. The level of vacancies remains high when compared to previous levels – vacancies are 1.4 times their levels 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 growth has shown clear signs of slowing, average earnings (excluding bonuses) edged lower to 6.5% from 6.7% prior and came below consensus estimates of an easing to 6.6%. Private sector average earnings declined to 7.0%. The single month growth in average earnings (ex-bonuses) was 0.2% for the second consecutive month; 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.
The labour market continues to show signs of some slack emerging driven by slowing demand for labour, but the evidence is far from conclusive as job growth remains resilient keeping the labour market tight but signs of moderation in private sector pay growth and an unwind in high inactivity will be welcomed.
This labour market print has been mixed with pay data pointing to some easing and continued strength in jobs seeing labour market pressures remain. Alongside developments in global financial markets, tomorrow’s Spring Budget where we are likely to see some spending on public sector pay rises and next week’s CPI release will be vital for the MPC. We have seen market expectations of hikes reprice considerably, in the wake of recent events in the US banking sector with markets now seeing a peak in Bank Rate of around 4.25%. We continue to expect the MPC to hike by 25 bps at their next meeting but see a higher risk of an earlier pause, in our base case we see them pausing with rates at 4.25%.