Employment and Wage Data Paint Mixed Picture for UK's Economic Outlook

The British Pound edged lower on conflicting signals from the UK economy in the mid-week session following news that UK wages grew slower than economists had been forecasting in the month of April while unemployment continued to fall.

Wages grew 2.1% where analysts had forecast growth of 2.4%.

However, the claimant count only grew 7.3K where analysts had forecast growth of 20.3K.

Today’s numbers also show that the number of those in employment is slightly below the 32 million mark, with 372k jobs having been added during the past 12 months, a rise of 1.2%.

"The strength of employment is one factor which will support consumer spending and prevent a sharper slowdown in the economy generally," says Philip Shaw, economist with Investec Economics.

But, the data is clearly not enough to propell the Pound higher after it was buoyed by the release of stronger-than-forecast inflation data out on June 13.

"After yesterday’s sharp rise in UK inflation, this morning’s unexpected drop in average earnings highlights a sharp rise in the cost living in the UK," says Joshua Mahony, analyst with IG. "Given the continued rise in inflation despite the recent decline in energy prices, there is a fear that UK consumers will be squeezed even more if we see oil prices turn higher."

We would be cautious of expecting a big move on the back of the data though as politics remain front and centre for the currency.

Employment growth in the three months to April at 109k was below consensus expectations (125k) and significantly lower than our own forecast of a 280k rise.

The undershoot, particularly relative to our estimate is largely down to a 500k drop in employment in April alone.

"Admittedly, while the single month data can be notoriously volatile – a fall of such a magnitude has never previously been seen in the history of the series, which started in 1992. The slowdown contrasts with the general resilience of labour demand reported in some recent business surveys, although a possible alternative explanation is that the slowdown is a reflection of growing labour shortages," says a note from Lloyds Bank to their commercial banking clients following the release.

The response from earnings growth continues to run counter to this narrative.

Overall average weekly pay (including bonuses) softened to a 2.1% annual growth pace, down from 2.3%, with regular pay dipping to 1.7% from 1.8% - a fifth consecutive monthly slowdown.

"Both measures are weaker than our and consensus expectations, and against a backdrop of quickening price inflation they point to the squeeze on real pay growth continuing through 2017 and possibly beyond," say Lloyds.

The Bank of England will therefore likely sit on current interest rate settings for the foreseeable future and offer little support for Sterling which would need higher interest rates to move notably higher against the Euro and US Dollar.

"At some stage we expect the weakness of wage growth to have a material impact on the MPC’s thinking. In yesterday’s reaction to the CPI, we cast some doubt on the committee’s wage growth forecast of 3.5% for next year," says Investec's Shaw.

The economist argues that if the trend shown in today’s figures is not reversed, the BoE’s wage forecast of 2.0% for this year could be undershot as well.

"Again this tends to reinforce our view that this will dissuade the MPC from seriously considering a hike in interest rates any time soon, and probably not before 2019. Committee members may well be wondering why a tightening in labour market conditions is not resulting in higher wage pressures," says Shaw.

Pound Sterling edged down on the figures, cable retreating from highs close to $1.28 to stand at $1.2730, although part of this move reflects the announcement that the agreement between the government and the DUP could be delayed until next week.

Indeed, politics will remain the key driver of the Pound going forward.