UK labour market continues to show signs of weakening
But progress remains painfully slow, leaving monetary policy in restrictive territory
The UK employment numbers published today will have been welcomed by the Bank of England (BoE) as showing further signs that the labour market is continuing to weaken. But this weakening is happening painfully slowly to leave very little prospect that monetary policy will be eased any time soon.
The modest drop in the measure of pay-rolled employees for November (falling 13k but partially offset by a 6k upwards revision to October’s number) will have been welcomed as a step in the right direction, but it is only a step. And it is a similar picture on the wages front. Weekly earnings ex-bonuses slowed from an upwardly revised 7.8% to 7.3% in the three months to October compared to last year, a fall that will be welcomed. But it leaves wages still growing too fast to be compatible with a 2% inflation target, a near 50% drop in the pace of growth required before long-standing BoE concerns over pay growth fuelling inflationary pressures will be assuaged.
On a more positive note, the slowdown in wages growth is becoming more evident each month. But the BoE will want to see more progress being made still and to be certain that this trend will continue into 2024, particularly so given the regular round of pay settlements that are seen in Q1. Raising some concerns will be the fact that the monthly fall in average weekly earnings ex-bonuses was only 0.3% in October, half the 0.6% average monthly reduction seen over the first nine months of 2023, and it is readings such as this that the BoE will want to be certain are not indications of things to come before it will consider loosening monetary policy.
As has been the case each month since January 2022, the monthly wage growth figure for September was revised upwards by 0.1% to 0.34%. But this is below the average 0.16% revision seen since January, and the outlook for wages growth is for the softening trend to continue: the y/y growth in the PAYE measure of median pay slowed to 5.3% in November, its slowest rate of growth since October 2021, while businesses in the BoE’s own Decision Maker Panel survey recently reported that wages growth over the next year is expected to slow to 5.1%. Welcome news for the BoE, but still too strong for any relaxtion in monetary policy to be contemplated.
On the employment front, although the number of pay-rolled employees was largely unchanged (down 13k as highlighted above), the number of job vacancies fell in the quarter to November by 45k, the 17th consecutive quarterly fall and now the longest run of such falls ever recorded. But vacancies still remain above pre-covid levels and as such represent an underlying level of support for higher wages. Further, recent survey evidence, such as the S&P composite PMI, suggest that employers expect worker numbers to remain largely unchanged going forward, suggesting a sharp fall in employment levels is not likely. This leaves growth in the size of the workforce as the main driver of any upwards movement in the rate of unemployment going forward - until we get the revised Labour Force Survey data from the ONS next spring, the actual rate of unemployment in the UK is unknown at the moment. However, when this figure is finally published next year, it should show that the level of unemployment is moving closer to the 5% level. And this, coupled with a steady reduction in wages growth, may finally be sufficient for the BoE to conclude that its work in bringing sufficient slack back to the labour market has been accomplished, in turn removing one of the current impediments to reducing interest rates.
But for now it leaves the BoE in a somewhat uncomfortable position. With the growth figures to be published tomorrow expected to show output falling by 0.1% in October, but core annual CPI still nearly three times above target, the pulls on monetary policy continue to come from opposite directions. All in all it leaves BoE policy at something of an impasse, forced to continue resisting pressure to lower rates in support of a slowing economy and instead forced to keep policy tight as it struggles to bring CPI and wages growth back under control.