UK Reaction: Unemployment holds steady as pay growth continues to rise
• The labour market remained tight in November with unemployment rate remaining at 3.7% in line with consensus expectations.
• The inactivity rate declined on the quarter, driven by falls in those out of the workforce due to studying, long-term sickness and early retirement.
• Employment growth remained robust, rising over the quarter by 27,000 above consensus expectations of a 5,000 increase.
• Wages continue to beat expectations with average regular pay (excluding bonuses) rising by 6.4% (consensus 6.3%).
• We continue to expect the Monetary Policy Committee (MPC) to hike by 50 basis points (bps) in February but tomorrow’s inflation figures will remain important. Slack is increasing gradually, but rising wages are likely to continue to see the MPC lean against inflationary pressures.
The unemployment rate for November 2022 remained at 3.7% when compared to last month’s figure, in line with consensus expectations. Over the quarter, the unemployment rate rose by 0.2 percentage points (ppt). Unemployment has picked up slightly, but the labour market remains tight with unemployment well below its historic averages, for example between 2015-2019 unemployment averaged 4.7%, 1 ppt higher than current levels. The rise in unemployment was driven by increases in the size of the workforce as economic activity pushed higher.
Employment growth remains firm, rising over the quarter by 27,000 above consensus expectations of a 5,000 increase. Overall, the employment rate remains unchanged on the quarter at 75.6%, with employment still 1 ppt lower than it was prior to the pandemic (Dec-Feb 2020). December’s HMRC payrolls figures point to continued strength in employment, with the number of payroll employees increasing by 28,000 following last month’s 70,000 (revised down from 107,000).
Economic inactivity rates were down 0.1 ppt on the quarter to 21.5% as the number of people out of the workforce due to studying, long-term sickness and those who had taken early retirement declined. The inactivity rate remains 1.3 ppt higher than it was prior to the pandemic (20.2% Dec-Feb 2020) and has been a key factor contributing to the current tightness of the UK labour market, it remains to be seen how far this increase in activity will be unwound.
The redundancy rate also picked up slightly this quarter to 3.4 per thousand from 2.4, moving it closer to the rates seen prior to the pandemic rates of around 4. The rise in redundancies seen so far is much more muted than the scale of increase seen during previous economic slowdowns.
Average total pay (including bonuses) and average regular pay (excluding bonuses) rose by 6.4% up from 6.2% and 6.1% in October respectively, this came above consensus expectations of average regular pay growth of 6.3%. The month-on-month growth in regular pay remains high increasing by 0.5% and remains well above where the MPC will want pay growth to settle. In real terms (adjusted for inflation), total and regular pay both fell by 2.6%.
The labour market is showing signs of some slack emerging – but the evidence is far from conclusive given strengthening pay growth and high inactivity. The labour market remains tight and pay growth has shown little sign of moderating. We expect the labour market to continue to cool this year lagging declines in economic activity. We see unemployment rising steadily over 2023 averaging 4.5% in 2023.
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 Monetary Policy Committee to hike Bank Rate by 50 bps in February, but this is likely to be a close call between 25 bps and 50 bps and tomorrow’s consumer price index data will be important in this respect. We also pencil in an additional 25 bps hike in March seeing rates peak at 4.25% but the risk of further hikes remains if the labour market remains tight. 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%.