Unemployment rises - no-one likes it, markets don't care...

13 Aug 2019

Phil Shaw, Victoria Clarke, Ryan Djajasaputra, George Brown

Investec Economists

The UK unemployment rate nudged up unexpectedly to 3.9% in (the three months) to June. Consensus and Investec forecasts had been for a steady rate of 3.8% for the fourth consecutive month. 

But barring the period of sub-4% unemployment over the first half of this year, the jobless rate remains at four decade lows. 
 
We have long remarked that the various labour market series are often ‘noisy’, probably due to the nature of the samples used by the ONS in computing the data. This makes it more difficult to identify trends and turning points. Indeed, the figures show conflicting features, but on balance we take the view that collectively, the numbers confirm the pattern of the past few months, which is of some cooling in labour market conditions. 
 
As an example of pitfalls in interpreting the figures, employment growth picked up to +115k (3m/3m) in June, compared with May’s subdued reading of +28k. Of this though, full-time working edged down by 3k, while part-time employment increased by 118k. But the number of part-time workers unable to find a full-time position fell by 17k, while those not wanting to work full-time rose by 123k. Confusing? Certainly.
While developments on the employment side are unclear, metrics other than unemployment were consistent with some loosening. In particular, the number of hours worked fell back marginally over the past three months. Also, the number of job vacancies between April to June fell back further to 820k, the lowest number of openings since March 2018. Notably there is a clear split across company size, with smaller business vacancies falling sharply, but those in larger firms continuing their upward trend, perhaps reflecting greater Brexit fears among SMEs.
Market fears of a no deal Brexit are very evident with sterling hovering just a little above the $1.20 level 
Meanwhile pay growth continued to strengthen. Headline weekly earnings growth picked up in line with expectations to 3.7% (3m yoy) from 3.5%, while the more widely watched ex-bonus series climbed to 3.9% from 3.6%, reaching an 11-year high. While doubts are often expressed over the link between labour scarcity and pay growth, we maintain our view that there is a valid ‘Phillips Curve’ relationship, albeit one that has shifted since the financial crisis. We would point out though that the earnings numbers have been flattered by the timing of public sector pay awards in the spring, with a risk that the figures fall back next month, as the favourable comparison falls out of the calculation. 
 
Overall our conclusion is that labour demand is softening modestly, but that historically low levels of unemployment are likely to prevent a significant dip in pay growth. Of course if the UK leaves the EU without a deal, this scenario becomes far from assured. Indeed from an interest rate policy and market perspective, fundamentals including today’s figures, are playing a subsidiary role to Brexit developments. Against this background, market fears of a no deal Brexit are very evident with sterling hovering just a little above the $1.20 level so far this week. Today’s data did not change this. 

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