UK Labour Market in Rude Health with Record Numbers Now in Work

- Strong data unable to save Sterling from its politically-induced malaise

- UK unemployment, wages data meet market expectations for May.

- But masks true strength of job market as record numbers find work.

- Odds of BoE rate rise in August increase. 

© IRStone, Adobe Stock

The UK economy continues to create jobs at a robust pace with May seeing a record proportion of the population participating in the labour market, official data shows.

The numbers point to underlying strength in the UK economy but were not enough to lift Sterling, which is in a politically-induced coma given the increasingly tenous state of the UK's ruling Conservative party.

The UK unemployment rate held steady at a record low of 4.2% during the three months to the end of May, in line with market expectations, while average earnings rose by 2.5%. This was also in line with expectations. 

Tuesday's in-line numbers mask what was otherwise a strong labour market report. There were 32.4 million people in work during the period, 137,000 more than in the prior three months and 388,000 more than one year ago. 

The number of unemployed people was 1.41 million, 12,000 fewer than in the previous quarter and 84,000 less than one year ago. 

This left the overall employment rate at 75.7%, its highest since comparable records began in 1971, while pushing the inactivity rate down to 21% and the lowest since modern records began. 

"Admittedly, the strong employment numbers weren’t accompanied by a pick-up in wage growth," says Ruth Gregory, an economist at Capital Economics. "However, the recent easing in wage growth looks unlikely to be sustained. Leading indicators of pay suggest that it is on track to at least meet the Bank of England’s forecast for underlying wage growth of 2.75% y/y in Q4."

Markets care about the labour data because of the influence that changes in unemployment and wages can have on inflation, in that lower unemployment and faster wage growth means greater demand within an economy and higher inflation further down the line.

Accordingly, the labour data also has implications for interest rates at the Bank of England because it is inflation that central banks are attempting to manipulate when they tinker with rates.

"The final set of labour market figures before the Monetary Policy Committee’s August meeting will not deter the Committee from pressing ahead and raising interest rates," Gregory adds. "As such, we continue to expect the MPC to vote to raise interest rates next month."

"May’s labour market report is hardly a humdinger but it likely will be just strong enough to convince the MPC that it should raise Bank Rate next month," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "But still-weak consumers’ confidence and the decline in employment intentions suggests that job-to-job flows will remain subdued, constraining overall wage gains. On balance, then, the labour market data won’t pressure the Committee to raise interest rates again swiftly after the likely August hike."

Bank of England to Raise Rates

The BoE has said repeatedly its forecasts for the economy and interest rates are contingent on a smooth and orderly Brexit process, as well as a rejuvination of UK inflation expectations. 

UK economic growth slowed from a quarterly pace of 0.4% in the final three months of 2017 to 0.2% in the first-quarter of 2018, leading to fears of a broader slowdown this year, although data released in July suggested the UK economy regained some of its lost momentum during the second quarter.

Inflation data for the month of June will be released Tuesday and is expected to show consumer price pressures picking back up as a result of an increase in oil prices, which might encourage hopes of an interest rate rise next month.

Pricing in interest rate derivatives markets currently implies an August 02 Bank Rate of 0.64%, which is just more than half way toward the 0.75% rate that would prevail if the BoE did go ahead and raise rates again next month.

This is a deterioration from the situation that existed at the beginning of April, when the implied probability of a rate hike having been announced by the August 02 Bank of England (BoE) meeting was more than 80%, and suggests markets are not entirely sure the Bank will pull the trigger next month.

Anything that augurs a greater sense of confidence in the prospect of a rate hike, on the part of traders, would be sure to support Pound Sterling.

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