Latest employment figures show UK labour market presents no bar to lower interest rates

Today’s UK employment data presented further signs that the strength of labour demand is continuing to slow in the UK, although the pace of the slowdown may be slower than that suggested by the official figures.

The headline rate of unemployment rose from 4.2% to 4.3%, in line with expectations, while the 3-mth-on-3mth change in the Labour Force Survey (LFS) measure of employment fell -178k in March, up from -156k in February but better than the expected reading of -220k. The payrolled employees measure of employment fell by -85k. However, a degree of caution needs to be exercised when reading these numbers. Firstly, on-going sampling problems associated with the LFS report make this official source of data unreliable. And second, the payrolls figure was heavily revised last month, from an initial decline of -67k to just -5k today, suggesting that today’s large decline may also be subject to such a hefty revision next month. So overall, while the signs are there that labour demand is slowing, the pace of decline may not be as rapid as today’s numbers are suggesting.

On the wages side, while overall wages growth excluding bonuses was unchanged at 6.0%, private sector wages slowed to 5.9%, less than the 6.0% figure the Bank of England (BoE) had forecast in its updated May economic forecasts. And on an annualized basis, they are now rising by 6.7%, a significant fall from the 10.6% figure recorded in February. However, on a 3-mth-on-3mth annualized basis, private sector wages are now rising by 5.2%, the fastest pace of growth since September last year, and an increase on the 4.4% reading seen in February. Looking at economy wide average earnings including bonuses, these remained unchanged at an upwardly revised 5.7%, with all economic sectors bar construction showing increases.

On balance, this pace of wages growth would still appear to be too strong to allow interest rates to be cut. But the recent messaging from the BoE suggests it is taking a more sanguine approach. One possible explanation for this relaxed attitude may be the 9.8% increase made to the National Living Wage (NLW) in April. Some employers likely acted ahead of this rise and raised wages for those workers earning slightly above the NLW in March, a scenario that would be consistent with the hospitality sector being reported as seeing some of the strongest wage increases. If this is an accurate picture, then wages growth may well show additional momentum over the next few months before starting to fade again over the summer, to leave year-on-year growth still slowing, if only moderately.

The key question, however, is what this means for the BoE and monetary policy. Even though there are questions over how fast the labour market is softening, what is certain is that it is easing, albeit gradually. And even though the wages growth numbers are still strong, they are broadly in line with the forecasts contained in the BoE’s May monetary report. As such, there is probably nothing in today’s data that suggests the on-going dovish tilt presented by the BoE at last week’s monetary policy meeting needs to be altered - the prospect of a first rate cut being delivered in August is still very much in play. But the strength of wages growth cannot be ignored, which we expect will transpire into a measured pace of further rate reductions thereafter rather than a more rapid pace of easing.