Strengthening economy: A worker laces a sneaker at a store in London. Starmer’s government is eager to get more people back to work after more than 800,000 dropped out of the labour market during the pandemic. — Reuters
LONDON: UK unemployment fell unexpectedly after companies hired at the strongest pace since November, a sign of underlying strength in the economy that complicates the Bank of England’s (BoE) shift toward lower interest rates.
The jobless rate fell 0.2 percentage points to 4.2% in the three months to June, according to the Office for National Statistics (ONS).
Economists had expected a small increase. Employment surged by 97,000, much stronger than the 3,000 increase that forecasters had expected. Wage growth slowed in line with expectations.
While economists questioned the reliability of the ONS’ Labour Force Survey, which underpins the unemployment data, investors interpreted the figures as a potentially inflationary sign the economy is picking up momentum.
Although the BoE has signalled it’s ready to cut borrowing costs again, it remains on guard against evidence that upward pressures on prices will stick around.
The headline unemployment rate is below the BoE’s forecast for 4.4% in the second quarter.
The pound jumped 0.3% to trade above US$1.28 on Tuesday, making the UK the best performing currency in the Group of 10 nations.
It contrasts with the situation in the United States, where weak jobs data rattled markets in recent weeks. Figures due later this week are likely to show robust economic growth in the UK and the first increase in inflation this year.
“Investors may raise questions about a weak US labour market and anemic eurozone growth, but the UK seemingly faces neither problem,” said Andrzej Szczepaniak, a senior economist at Nomura.
“Still strong labour market data in the UK as well as still strong activity data support our house view of divergence between the Federal Reserve and BoE.”
Employment rose across the board, with only 16 to 17-year olds registering a material decline over the quarter.
The number of employees on company payrolls rose more than 24,000 in July, more than double the increase economists had forecast, according to real-time data derived from administrative data.
Prime Minister Keir Starmer’s government is eager to get more people back to work after more than 800,000 dropped out of the labour market during the pandemic. That worker shortage has held back the economy’s ability to expand without sparking inflation.
Chancellor of the Exchequer Rachel Reeves embraced the figures but said further measures to encourage work will be in the budget.
“Today’s figures show there is more to do in supporting people into employment because if you can work, you should work,” Reeves said.
The Conservatives, who lost power in the election in July 4, said Tuesday’s data showed the previous government was delivering stronger growth.
“Labour’s claims of a terrible economic inheritance are a complete fabrication,” said Mel Stride, the Conservative member of Parliament who speaks on work and pensions issues.
Separate data showed regular wage growth cooled to 5.4%, down from 5.8% in the previous period.
It was the weakest year-on-year pay increase since the summer of 2022.
Total pay growth, which includes bonuses, dropped sharply to 4.5%, down from 5.7%. This was largely driven by a one-time bonus paid to National Health Service employees last year.
BoE officials had been focused on the wage figures for signs of inflation but also are looking at the ability of the broader jobs market to drive up pay and prices.
“Private sector regular pay growth cooled again in June and is on course to fall below 5% in upcoming data releases.
“The figures support the case for more easing from the BoE this year, though the downside surprise in the unemployment rate flags the risk that the jobs market could start to tighten again if the economy continues to recover quickly. That’s likely to keep the BoE cautious – we think it will take the next step lower in November,” said Dan Hanson, senior Bloomberg economist.
A raft of UK economic data this week will set the tone for the BoE in the lead-up to its next policy decision on Sept 19.
Investors are betting on the next cut arriving in November, but BoE officials have said they’ll move carefully while they assess the strength of domestic price pressures in the economy.
“The concern for the BoE will be the signal the data is sending about the underlying strength of the labour market,” said Stuart Cole, head macro economist at Equiti Capital.
“With the consumer price index also expected to show inflationary pressures starting to creep upwards again, once everything has been digested the market conclusion may well be that a further rate cut being seen this year is not a done deal yet.”Inflation figures are likely to show the first increase in price pressures this year, and a much stronger reading could undermine the case for a further loosening from the BoE.
Some officials have signalled their lingering concerns over strong wage growth. Catherine Mann – who was among four hawkish rate-setters to oppose a change earlier this month – warned on Monday that an “upward ratchet” in wages and prices will “take a long time to erode away.”— Bloomberg
