UK Reaction: Labour market slack emerging, but pay moderation needed for BoE pause

• Unemployment rate rose to 3.9% in March 2023, above consensus estimates unemployment remaining at 3.8.

• Declines in economic inactivity drove the rise in the unemployment and was offset by continued strength in employment. Employment rose by 169,000 over the quarter, above consensus estimates of a 50,000 rise.

• Wages growth picked up in March rising to 6.7% but the pace of increase slowed and leaves wages in line with Bank of England (BoE) projections. This compares to consensus estimates of a rise to 6.8%.

• Evidence of further slack emerging is rising: the unemployment rate picked up and the forward looking payrolls estimates turned sharply.

• We continue to expect the Monetary Policy Committee (MPC) to remain on hold at its June meeting. Upcoming data – particularly next month's labour market data – will confirm whether these trends persist and pay moderates remain important. 

The UK unemployment rate rose to 3.9% in March 2023 (consensus 3.8%); employment rose by a staggering 182,000 but was offset by even larger rises in economic activity as more workers returned to the labour market, lifting the unemployment rate by 0.1 percentage points (ppt), and HMRC payrolls figures point to further easing to come. This compares to the BoE expectation that unemployment would remain at 3.8% in Q1 and Q2 of this year. At the same time, wages remained elevated but came in close to both consensus and BoE expectations. The MPC has been clear that upside surprises compared to their expectations of labour market tightness and wage growth could warrant further hikes, and we see this print as coming in line, if not slightly below their expectations and importantly signalling that further moderation is likely to continue adding to our calls that the BoE is likely to remain on hold at 4.5% in June.

Employment rose by 182,000 over the quarter, above consensus expectations of a 160,000 rise in employment. The increase was split evenly between an uptick in self-employment (+87,000) and employees (+84,000). Most of these new jobs continue to be in part-time employment (+181,000) whilst full-time work changed over the quarter by -41,000. The increase in part-time employment was driven primarily by those who did not want a full-time job (76% of those surveyed), but we are seeing a rising proportion who are unable to find a full-time job (12% of those surveyed). The more timely (but revision-prone) HMRC payrolls figure for April pointed to potential for a sizeable moderation in employment in the coming months, falling by 135,000 on the month – the first decline in these figures since February 2021.

The economic inactivity rate continues to decline as workers who left the workforce over the pandemic continue to gradually return to the labour force. Inactivity declined to 21% and was down 0.4ppt on the quarter. Recent moves were driven by a decline in inactivity due to studying (-95,000) and looking after family/home (-42,000), and smaller moves in those who had taken early retirement (-23,000) also contributed to the fall in inactivity. Long-term sickness, likely exacerbated by pressures in the National Health Service, also continues to rise (+86,000). The inactivity rate now stands 0.8ppt higher than it was prior to the pandemic (Dec-Feb 2020), but the trend of rising activity is going some way to reverse this trend and relieve pressure on supply in the labour market. 

Labour demand continues to moderate with vacancies declining by 55,000 in the quarter to April 2023 to 1.1 million – its tenth consecutive quarterly decline. The level of vacancies remains high when compared to previous levels – vacancies are 1.3 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, which are closely watched by the MPC as a key measure of the balance of supply and demand in the labour market, picked up slightly close to expectations. Average earnings (excluding bonuses) rose to 6.7%, a touch below consensus expectations of a rise to 6.8% from 6.6% in February. Looking at private sector earning (ex-bonuses), the single month wage growth rate showed signs of moderation, slowing to 0.3% month-on-month following last month's reacceleration. This leaves private sector regular wages averaging 7.0% over Q1 in line with the BoE's recent projections.

The labour market continues to show signs of some slack emerging driven by slowing demand for labour and increases in labour supply which has been constrained over recent months but the labour market remains tight. We expect to see employment growth slow in coming months, with the HMRC payrolls indicating this moderation may be imminent. Despite the developments, the evidence that the labour market has moderated is far from conclusive as job growth remains resilient and pay growth remains elevated.

This labour market print continues to point towards moderation in the labour market, and the MPC will want to see this continued with tightness easing further and wage growth slowing in next month's labour market print. But we can see this data is moving us closer to the pause we expect in June. The Bank’s assessment of inflation persistence revolves around three key factors: the tightness of labour market conditions, the behaviour of wage growth and services inflation. We think on this basis and given that  wages have come in line with the Bank's expectation and signs that unemployment is moderating, the Bank are likely to remain on hold in June, keeping Bank Rate at 4.5%. The risk of a further hike remains and developments in the upcoming inflation prints and next month's labour market data remain central. We expect the MPC to remain on hold throughout 2023. Following this we expect the MPC to unwind these hikes in 2024, pencilling one 100 basis points of cuts across the year from February 2023, bringing Bank Rate to 3.5% by end 2024.