UK Reaction: Employment falls as wage growth pushes higher

The September Labour Force Survey (LFS) data was mixed, the UK labour market remains tight, but we are beginning to see some nascent signs of slack emerging with falls in employment and data pointing to sharp rises in unemployment to come. Wage growth however remains robust, and will not be able to abate fears of further persistence in inflation. The unemployment rate for July to September 2022 decreased by 0.2 ppts over the quarter to 3.6% from 3.8% but rose when compared to August’s figure of 3.5%. This came above consensus expectations of unemployment at 3.5%. The single month figure rose even more sharply to 3.8% - though it should be noted that the single month figure tends to be volatile. Employment declined over the quarter by 52,000 coming in below consensus expectations of a 25,000 decline.

The economic inactivity rate remains well above pre-pandemic levels and rising. Over the quarter the inactivity rate rose 0.2 ppts to 21.6% and prior to the pandemic the inactivity rate was 20.2% (Dec-Feb 2020). Those who were economically inactive because of long-term sickness increased to a record high and drove the increase in economic inactivity over this quarter. Constrained labour supply and rising inactivity has been one of the main uncertainties over the labour market since the pandemic and could see the labour market remain tight despite sharp falls in demand.

Labour demand continues to show signs of cooling with the number of vacancies falling by 46,000 on the quarter (Aug-Oct 2022) to 1.23 million, this marks the fourth 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 800,000.

Despite the clear evidence of cooling in labour demand, wage growth remains strong and continues to surprise to the upside. Average total pay (including bonuses) was 6.0% and growth in regular pay (excluding bonuses) was 5.7%, both above consensus expectations of a 5.9% and 5.5% rise respectively. The rise in regular pay, watched closely by the MPC as a sign of domestic inflationary remains high roe to their highest level outside of the coronavirus period, and the single month figure rose by 0.5%, the third consecutive month of wage growth above 0.5%.

The labour market is showing some signs of slack emerging, but at present this has been driven entirely by falling demand for labour. There is still likely to be considerable concern over the labour market as wage growth remains robust adding to fears of second round effects. We continue to expect the MPC to hike the Bank Rate by 50 bps at their next meeting in December. We also pencil in a 50 bps hike in February and a further 25 bps hike in March seeing rates peak at 4.25%. We also expect to see the MPC unwind some of these hikes, pencilling one cut in Q4 2023, bringing rates to 4.00%.

Financial market reaction to the print was mixed. Sterling rose against the dollar by 0.4% whilst the pound fell against the euro by 0.3%.