UK Reaction: Lower unemployment and higher wages adds to case for BoE hawks
• The Labour Force Survey (LFS) estimates for July showed the labour market remains tight. Unemployment fell to 3.6% from 3.8% driven by increases in inactivity over the three months to July, adding to upward pressure in the labour market.
• Vacancies (in August) declined for the second consecutive month, falling back by 34,000, a sign that labour demand is beginning to moderate.
• Wage growth surprised to the upside rising by 5.5% (consensus 5.4%) and underlying wage growth (excluding bonuses) rose to 5.2%.
• The strong labour market data adds to the case for the hawks. We expect that the BoE will hike rates by 75 basis points (bps) in their meeting next week.
The July LFS data showed the UK labour market remains tight, with falling labour supply pushing unemployment lower, whilst demand continues to show green shoots of moderation to come. Unemployment declined unexpectedly in the three months to July as more people left the workforce pushing unemployment rates to the lowest levels for 50 years. The unemployment rate decreased over the quarter to 3.6% from 3.8%, below consensus expectations of the rate remaining at 3.8%. This marks the lowest level of unemployment since 1974. The decline in unemployment was driven by a sizeable increase in the number of people who left the workforce, with economic inactivity rising to 21.7% from 21.4% – inactivity has continued to rise over the months and now stands 1.5 percentage points higher than it was prior to the pandemic (20.2% in Dec-Feb 2020). The employment rate also declined over the quarter to 75.4% from 75.6%.
Average weekly earnings (including bonuses) rose by 5.5% in the three months to July a touch above consensus expectations of a 5.4% rise. The miss can be explained in part by the small upward revision to June’s wage growth figures to 5.2% from 5.1%. Key for the Monetary Policy Committee (MPC) is the underlying wage growth excluding bonuses rose which rose to 5.2% up from 4.7% in June. Looking at the single month figure, growth in wages accelerated between July and June rising by 0.5% compared to the 0.2% rise in June, a development which will unsettle the MPC.
Timelier HMRC estimates of the number of payrolled employee show a 71,000 increase in August following last month’s rise of 77,000. The rate of growth of employment remains around 3 times higher than the average rate prior to the pandemic of 25,000 per month. The LFS employment figures slowed considerably, rising by 40,000 in the three months to July down from 160,000. We think that an end to the extraordinary rate of employment growth is looming: vacancies have declined for a second consecutive month, falling back over the quarter by 34,000.
The labour market data remains mixed. There is tentative evidence that the demand for labour is beginning to moderate with vacancies continuing to fall, but the constrained supply of labour is still seeing the labour market tighten. We expect that increases in the inactivity rate will begin to unwind as some of those who have left the workforce during the pandemic return but the timing of this will be key for the MPC. The labour market remains key to upcoming MPC decisions, as they have made clear that a weakening economy will not prevent them from ensuring inflation returns to target. At present we expect the BoE will hike rates by 75bps in September. This decision is finely balanced, but the decline in unemployment and continued upside surprise in wage data adds to the case for a larger move.
Financial markets reacted to with the surprise fall in unemployment and continued tightening of the labour market adding to expectations of rate hikes. The pound appreciated against the dollar and euro following the data’s release. The pound rose by 0.2% against the euro, now trading at £0.866. The pound rose 0.3% against the dollar, now trading at $1.172.