Jobs data increasingly grim

Jobs data increasingly grim – by Rob Morgan, Chief Investment Analyst at Charles Stanley

The jobs market continues to paint a glum picture for the UK economy, which now appears to be losing momentum worryingly quickly.

Having held steady at 4.4% for several months, the unemployment rate ticked up in the three months to March to 4.5%, then to 4.6% for April and now 4.7% for May.

Payrolls have also declined each month since the Budget last October – when the Chancellor announced the hike in National Insurance contributions for employers – underlining the reluctance of businesses to recruit and retain staff.

It’s a signal for households to take a more cautious view of the employment market and build their resilience for leaner times if possible.

Wages now moderating

Cracks in the employment market previously stood in contrast to average wages, which remained buoyant for a long time. However, there are now clear signs pay awards are rolling over too. April’s figure showed a significant easing to 5.2% from 5.4% a month earlier, and May’s reading is 5%.

Weaker wage growth combined with economic deceleration makes it more likely the Bank of England will cut interest rates again in August as it focuses more on the jobs markets and less on inflation that could subside after a stubborn patch this summer.

Focus on jobs, but inflationary trends still a concern

BoE Governor Bailey’s recent comments indicate he is open to cutting interest rates at a carefully managed pace if the jobs market continues to deteriorate. The extent of falling payrolls will probably be ringing alarm bells with other MPC members too, shifting their attention from inflation stickiness to economic weakness.

With growth moving into reverse gear during the second quarter, contracting by -0.3% in April and -0.1% in May,  the omens are not good and much of the positive momentum seen in the first quarter has reversed.

Overall, an August cut still seems likely as the lacklustre economic picture and the deteriorating labour market come more sharply into focus, but the lingering effect of wage inflation and payroll costs could make further cuts a longer time coming. The pass through of higher employment burden onto consumers is likely to keep inflation significantly over 3% for the rest of the year, making it difficult for the BoE to cut aggressively.