Employment Data: British Pound Mixed Despite Good News on UK Productivity Stats, Wage Growth Seen at 2.2%

UK labour market statistics form the economic highlight for Pound Sterling today.

Key points:

  1. Average earnings index is up 2.2%, better than the 2.1% forecast by economists
  2. UK productivity surges to six-year high at 0.9%
  3. Unemployment rate unchanged at 4.3%

The British Pound was seen trading in mixed fashion - up against the Dollar but down on the recovering Euro - following the release of solid UK labour market data from the ONS.

The stand-out good news, from a currency perspective, was a rise in productivity to 0.9%, the best reading seen since 2011.

The Bank of England has long been looking for productivity - the amount of work carried out by individual workers - to grow, noting that it has remain subdued since the great recession. Only greater productivity commands greater wages.

Indeed, wage growth rose 2.2% according to the ONS, ahead of analyst forecasts for a rise of 2.1% to be delivered, but lower than the previous month's 2.3%. However - the previous month's reading was also upgraded from a previous 2.2%.

However, it is noted that the numbers in work fell by 14K in October, the first fall in 13 months and this is why currency markets might be taking the overall release as something of a mixed bag for Sterling.

"Given the strength of the hiring surveys, the drop in employment looks more likely to be a blip than the beginnings of more sustained weakness in jobs growth. And the weak figures did have the silver lining of an increase in output per worker to 0.4% from minus 0.1% in Q2," says Andrew Wishart, UK Economist at Capital Economics.

The wage data has implications on the Bank of England's future interest rate policy agenda which in turn has implications for the Pound.

“While Governor Carney may have saved some ink after yesterday’s UK inflation figures, the true test for the BoE’s hawkish assumptions over the coming months will be the labour market data – not least wage inflation dynamics,” says Viraj Patel, a foreign exchange strategist at ING Group.

Wage inflation is at 2.2% but remains below the overall inflation rate of 3% suggesting UK workers are ending up with less in their pocket each month. Hence why the Bank of England rose interest rates in November - raising rates tends to weigh on inflation which in turn boosts the Pound. 

"We still expect a pick-up in wage growth ahead, in line with the REC permanent salaries survey and BoE agent’s reports of increasing difficulty hiring," says Wishart.

At the time of writing the Pound-to-Euro exchange rate is at 1.1137, the Pound-to-Dollar exchange rate is at 1.3192.

“It may be a bit too premature to draw any tangible conclusions from today’s UK jobs report, but we will need to see wage growth moving in the right direction soon to justify any further UK rate curve steepening (assuming a smooth Brexit),” Patel adds referring to market expectations for future interest rate rises.

The Bank of England raised interest rates for the first time in a decade earlier on in November, taking the base rate up by 25 basis points to 0.50%, as part of an effort to combat rising inflation.

UK inflation has risen from an annualised rate of 0.5% in June 2016, mostly as a result of a sharp fall in the value of the British Pound, itself the result of the Brexit referendum in June last year.

“It is not completely excluded that Carney will have to worry again in November as the oil price has been rising recently,” says Antje Praefcke, an analyst at Commerzbank. “But inflation is likely to have peaked in October and is likely to ease slowly now.”

Although much of the foreign exchange devaluation is now baked into the consumer price (inflation) basket, other factors could soon place upward pressure on inflation, not least of all the recent double-digit rise in the price of oil.

Meanwhile, the right kind of inflation pressures (sufficient wage growth) are still missing in action in the UK, while risks to Sterling remain high going into December as markets wait to see whether "sufficient progress" will be made in the Brexit negotiations. Any delay to talks moving onto the subjects of transition and trade could place renewed pressure on the Pound.

“Similar to the situation in other countries, the UK is not recording a sustainable rise in wage levels that could fuel inflation,” Praefcke adds. “As a result of this and due to the Brexit risks the BoE remains cautious. It only projects two further rate hikes until year-end 2020.”

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