UK Employment Data Still Strong and Here is Why Wage Growth Could Soon Accelerate

Strong U.K labour market data has not provided the British pound the support it needs to stage a turn-around.

December employment data released on Wednesday the 20th of January showed further improvements in the UK's employment situation.

The data showed a fall in the headline Unemployment Rate to 5.1%, which was below the expected 5.2% and previous 5.2%.

The number of Jobless Claims fell by -4.3k when a rise to 2.8k had been expected, and showed a further substantial decline from the previous month’s -2.2k result.

Employment Change also showed a much higher-than-expected rise in the number of people finding work of 267k when 235k had been forecast.

The Participation Rate also rose to its highest level since 1990 and the number of vacancies also rose to a record high of 756k.

Yet despite these positives, the data on wages disappointed, as it showed a decline in the rate of wage growth to 2.0% for Earnings Ex Bonus; and a fall to 1.9% for Wages Including Bonuses, which though better-than the deeper decline to 1.8% forecast, nevertheless showed wage pressures are still subdued. 

Wage Pressures are Growing, But Bank of England Wants to See More

For the Bank of England inflation remains key - and they will only likely raise interest rates once growing wages starts pushing inflation higher.

Wages grow when employment conditions are tight and demand for skilled labour translates into higher pay packets.

“Carney’s comments that the NAIRU might be lower than previously assumed (the NAIRU is the level of unemployment above which inflation is not expected to rise) suggests there’s more slack in the labour market than they thought back in November.”

However the Institute of Directors have suggested the labour market may be tighter than the data suggests: 

“We have the lowest jobseekers-to-vacancies ratio since the beginning of 2005, with firms still hunting for skilled employees. While this is clearly good news and the increasing number of vacancies means that the unemployment rate could continue to drop, addressing the skills gap takes on a fresh importance. For small firms that employ fewer than ten employees, the struggle to find workers is particularly acute, with vacancies rising by 13.1 per cent in the last quarter," says the IoD's Economist Michael Martins.

Wage growth, too, has remained strong in real terms at around 2 per cent, "as the competition for talent intensifies. In sectors like construction, where wages have increased by more than 6 per cent, the lack of skilled workers is clearly acute," says Martins.

Nevertheless, the data will unlikely shift thinking patterns at the Bank of England.

“Ultimately, we don’t see this report as affecting the Bank of England one way or another, though: Governor Carney and MPC member Vlieghe’s speeches this week have both reinforced our view that the Bank of England is on hold for the better part of 2016,” say TD Securities.

When Will the BoE Raise Interest Rates?

Banca Intesa SanPaulo expect a hike this year, although they dropped their May call as a result of Carney and Vlieghe’s dovish speeches earlier in the week.

The Italian lender cited the IMF’s report on Tuesday, as a reason they are still confident of a rate hike this year, since the IMF singled out the U.K economy in 2016, by leaving its growth forecast unchanged. 

Their currency strategists said: 

“The baseline scenario continues to include an initial rate hike this year.

“Yesterday, the IMF, while revising downwards its growth forecasts for the advanced economies, left its projections unchanged for the United Kingdom.

“Carney also remarked that domestic demand is solid, and consumption is robust, adding that the BoE wants to avoid an overshooting of inflation.”

In a flash note after the event UniCredit’s Daniel Vernazza said he was sticking by his November rate hike call, although added that risks were now skewed towards a delay.

In a long and detailed note, the bank’s lead U.K Economist said:

“It is very much more of the same; that is, the contrasting signals from stronger employment growth and weaker wage growth that has come back to haunt the MPC.

“But, there is hope in today’s report that the weakness in wages could prove temporary.

“Indeed, the level of regular pay (which excludes volatile bonuses) did rise in November and jumped for finance and business services. 

He goes on to highlight how Carney’s three pre-conditions of a hike – “prospects of growth in excess of trend,” “evidence of and expectations for a sustainable firming in domestic cost pressures”, and, “higher core inflation,” were still far from being met:

“With economic growth slowing (we expect below trend growth of 1.9% this year, down from 2.2% last year) and wage growth levelling-off, these preconditions are unlikely to be satisfied until towards the end of the year.”

“We continue to expect the first rate hike in November, with the risks skewed towards a later hike.”