Britain’s red-hot labor market showed signs of cooling as unemployment hit the highest level since 2021, the number in work declined and private-sector wage growth eased.
(Bloomberg) — Britain’s red-hot labor market showed signs of cooling as unemployment hit the highest level since 2021, the number in work declined and private-sector wage growth eased.
The portion of people out of work and looking for a job rose to 4.3% in the three months through July, the highest since September 2021, the Office for National Statistics said Tuesday. The report also showed average earnings excluding bonuses rose 7.8% from a year earlier, maintaining the fastest pace since the series began in 2001.
The figures marked the biggest drop in employment outside a recession and suggests the BOE’s effort to cool the economy is working, according to the Resolution Foundation. It also eased a swingeing cost-of-living crisis, with total wage growth overtaking inflation for the first time since March 2022.
“We still expect a rate hike next week, but with unemployment rising too, this latest data doesn’t scream a need to lift rates much further,” said James Smith, developed markets economist at ING.
The pound slipped after the data, falling as much as 0.3% to $1.2477 as traders pared expectations for further tightening. Swap pricing shows the market increasingly expects a quarter-point increase this month will be the BOE’s last for the cycle. Looking further out, traders are positioned for around half a point of interest-rate cuts by the end of next year.
While the labor market data provides respite to Bank of England policymakers, it also signals some relief for Britons, who saw the first real wage growth in 16 months. Real total pay rose 0.6% in the three months to July compared to a year earlier, a data point Prime Minister Rishi Sunak can use to argue the crisis may be easing.
“Earnings in cash terms continue to increase, at a record rate outside the pandemic-affected period,” said Darren Morgan, director of economic statistics at the ONS. “Coupled with lower inflation, this means people’s real pay is no longer falling.”
Investors focused on signs the labor market is starting to cool in response to the squeeze being inflicted by the highest borrowing costs since 2008.
- Vacancies fell below 1 million for the first time since August 2021.
- Employment plunged by 207,000, the biggest dip since October 2020.
- Unemployment rose by 159,000 to 1.46 million.
- Total hours worked dropped below pre-Covid levels again.
- Private sector regular wage growth, which the BOE is watching for signs of persistent inflation, slid to 8.1% from 8.2%.
“Despite clear signs of weakening momentum, we still expect the Bank of England to raise interest rates by 25 basis points next week,” said Yael Selfin, chief economist at KPMG UK. “The threshold for further increases may be hard to meet given the current economic outlook.”
Strong divisions have emerged at the central bank about how to respond to inflation. Governor Andrew Bailey suggested the BOE was nearing an end to its quickest series of rate hikes in more than three decades. However, fellow policy Catherine Mann on Monday revealed potential splits on the Monetary Policy Committee when she urged officials to “err on the side of tightening further” to prevent elevated inflation from taking root.
What Bloomberg Economics Says …
“The strength of headline pay growth in the latest jobs data keeps the Bank of England on course to hike again in September. But with tentative signs that wage growth may be cooling on an underlying basis and with labor demand easing, the bigger question is whether that will be the last one of the cycle.”
—Ana Andrade and Dan Hanson, Bloomberg Economics. Click for the REACT.
The focus will now turn inflation data next week. The BOE is forecasting a temporary uptick to 7.1% in August before price growth resumes its decline toward the 2% target.
“The year on year rise in average weekly earnings will be a headache for the BOE and lends support to the hawkish members of the committee,” said Janet Mui, head of market analysis at RBC Brewin Dolphin in London.
Chancellor of the Exchequer Jeremy Hunt said the UK needed to focus on fighting inflation. “Wage growth remains high, partly reflecting one-off payments to public sector workers, but for real wages to grow sustainably we must stick to our plan to halve inflation,” Hunt said.
The BOE expects unemployment to rise steadily to 5% by 2026, but a key question is how far it has to rise before the labor market is cool enough to take the heat out of wages, which have been bid up by workers to trying to keep up with the rising cost of living. Bloomberg Economics thinks that rate is higher than the 4.25% currently assumed by the central bank.
Labor shortages have given workers unprecedented bargaining power, though there are signs of that many people are now returning to the labor market.
The economy lost a further 281,000 working days to strikes in July, taking the total over the past 12 months to 4.2 million – the most since 1989-90. Controversial strike rules became law in July that will force some employees to work during industrial action or be fired, enraging labor unions that have vowed to challenge them.
Inactivity — people out of work and not looking for a job — increased for a second month running and is now 410,000 higher than before the pandemic. The increase was driven by another rise in long term sickness among the working aged to 2.6 million and a sharp rise in student numbers.
–With assistance from Andrew Atkinson, Eamon Akil Farhat, Matthew Burgess, Aline Oyamada, James Hirai and Greg Ritchie.
(Updates market pricing in fifth paragraph.)
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