Investment Clock insights

Strong pay growth; still tight labour market


Melanie Baker

11 December 2018

The unemployment rate remained at 4.1% in October, employment gains were stronger than expected (+79K over the three months to October) and pay growth surprised on the upside too.  All in all, strong UK labour market data this morning.  Brexit uncertainty may yet disrupt hiring, but for now the numbers continue to look good. They are also a reminder that, were it not for Brexit uncertainty, the Bank of England (BoE) would look much closer to raising rates again than they currently do.
Year on year private sector regular pay growth hit 3.6%Y, the strongest since mid-2015 (the headline three-month average rose a tenth to 3.4%). In isolation, that’s good news for consumers, although is also consistent with expecting higher domestically-driven inflation.  
Jobs growth was healthier than expected, with the increase in numbers for full-time employees better than the headline figures too.  With the UK likely at full employment, it would not be surprising to see employment growth slowing.  So far, however, employment growth is holding up above 1%Y.
The broader labour market data continues to point to tightness: There were falls in the numbers of temporary and part-time employees who, respectively, couldn’t find a permanent job or a full-time job.  Average hours were steady, vacancies stable and redundancy levels were low and unchanged.
What does all this mean for the BoE?  Not a lot until more of the Brexit uncertainty is behind us.  When it is, the combination of a healthy looking labour market and rising pay growth suggests that rate rises are still likely. The Bank staff forecast (as of the November Inflation Report) was 4.0% for this month’s unemployment release, so close to today’s outcome. The BoE’s central case for the economy would be consistent with average regular weekly earnings growth around 3.25% in the period through to the middle of next year.  As of today’s data, it reached 3.5%YoY.

The unemployment rate remained at 4.1% in October, employment gains were stronger than expected (+79K over the three months to October) and pay growth surprised on the upside too. All in all, strong UK labour market data this morning. Brexit uncertainty may yet disrupt hiring, but for now the numbers continue to look good. They are also a reminder that, were it not for Brexit uncertainty, the Bank of England (BoE) would look much closer to raising rates again than they currently do.

Year on year private sector regular pay growth hit 3.6%Y, the strongest since mid-2015 (the headline three-month average rose a tenth to 3.4%). In isolation, that’s good news for consumers, although is also consistent with expecting higher domestically-driven inflation.  

Jobs growth was healthier than expected, with the increase in numbers for full-time employees better than the headline figures too.  With the UK likely at full employment, it would not be surprising to see employment growth slowing.  So far, however, employment growth is holding up above 1%Y.

The broader labour market data continues to point to tightness: There were falls in the numbers of temporary and part-time employees who, respectively, couldn’t find a permanent job or a full-time job.  Average hours were steady, vacancies stable and redundancy levels were low and unchanged.

What does all this mean for the BoE?  Not a lot until more of the Brexit uncertainty is behind us.  When it is, the combination of a healthy looking labour market and rising pay growth suggests that rate rises are still likely. The Bank staff forecast (as of the November Inflation Report) was 4.0% for this month’s unemployment release, so close to today’s outcome. The BoE’s central case for the economy would be consistent with average regular weekly earnings growth around 3.25% in the period through to the middle of next year.  As of today’s data, it reached 3.5%YoY.

Source: Thomson Reuters Datastream as at 30/09/2018

Source: Thomson Reuters Datastream as at 15/10/2018

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.