The UK labor market is demonstrating notable resilience in the face of economic challenges and recent interest rate hikes, presenting a complex scenario for the Bank of England in its efforts to curb inflation.
According to the latest data from the Office for National Statistics, key indicators such as headline earnings growth, payroll data, and the unemployment rate have not shown significant signs of weakness.
The report presents a nuanced picture, with regular wage growth decelerating and job vacancies experiencing a prolonged decline. These mixed signals add complexity to the decision-making process for policymakers. Further complicating the analysis, some data were derived from experimental estimates due to limited responses in the ONS’s Labor Force Survey.
Despite these mixed signals, the core of the labor market remains tight, suggesting the Bank of England may maintain high interest rates in the short term, as per Yael Selfin, chief economist at KPMG UK. The release of this data triggered a slight increase in the value of the pound, though changes were modest against the dollar and stable against the euro.
Market expectations regarding future interest rate movements appear unchanged. Swap pricing suggests that the Bank of England has concluded its rate increases and is expected to maintain tight policy until the latter half of 2024.
Highlights from the ONS report include:
- Total wage growth in Q3 fell to 7.9% from a revised 8.2%, surpassing the anticipated 7.3%.
- Public sector regular pay increased to 7.3% from 6.8%, influencing the headline figures.
- Payrolls saw an unexpected increase of 33,000 in October, with September’s data revised to show growth.
- Total employment rose by 54,000 in Q3, while inactivity increased by 33,000.
- The unemployment rate remained steady at 4.2%, contrary to the Bank of England’s expectations of a gradual increase.
- The claimant count rate held at 4% in October.
- Real regular pay rose by 1.3%, marking the fastest increase in two years.
This data does little to alleviate the Bank of England’s concerns about the labor market exerting upward pressure on prices. Businesses continue to face hiring challenges, pushing up wages, as indicated by Alexandra Hall-Chen from the Institute of Directors.
The report also reveals signs of cooling in the labor market, with officials increasingly confident about winning the battle against inflation after raising interest rates from 0.1% to 5.25% in under two years. However, average earnings growth, excluding bonuses, aligned with expectations, and the private sector’s regular wage growth slowed. Job vacancies have also seen a significant decrease, marking the lowest level since June 2021.
Policymakers emphasize the importance of maintaining “restrictive” policy to ensure wage growth aligns with the 2% inflation target. Market predictions hint at an initial rate cut in August next year.
Stuart Cole of Equiti Capital in London notes that the slow moderation of wage growth likely disappoints the Bank of England, suggesting interest rates will remain high for an extended period to continue exerting downward pressure on inflation.
Inflation figures for October, set for release soon, will be crucial in determining the path for interest rates. While the headline CPI rate is expected to slow, focus will be on services inflation to assess underlying price pressures. A stronger-than-expected reading could lead traders to reassess rate cut bets.
ONS highlighted that the annual growth in regular pay is among the highest since records began in 2001. The ONS will resume its Labor Force Survey in December, with a revamped version expected in March. Until then, the Bank of England will likely rely on its labor market indicators, which show slightly lower wage growth than official measures.
Darren Morgan of the ONS summarized the current labor market situation as largely unchanged, with real pay now growing at its fastest rate in two years, providing a slightly optimistic outlook amidst economic challenges.
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Author Kristen Moran 