12 Apr 2017
UK labour market (Feb): A little less slack, but a wage pickup remains elusive
UK labour market data for February showed headline wage growth a little firmer than expected, at +2.3% 3m yoy (consensus +2.2%, Investec +2.0%). But we would warn against paying too much attention to the headline number – private sector regular (excluding bonus) pay growth weakened to +2.4% (3m yoy) from +2.7%.
Meanwhile, employment growth slowed by a little more than expected, to +39k in the three months to February (consensus 70k, January 92k) although the unemployment rate held steady at 4.7%. Employment in terms of total hours worked remains strong, at +1.3% (3m/3m). Taken together, these numbers suggest, we think, a slight further closing in the degree of labour market slack, while a pickup in underlying wage growth remains elusive.
Delving deeper into the employment data, we think there are increasing signs that employment growth, at least in terms of the number of people employed, is slowing. In the six months to February, only 30k jobs were added to the economy versus the preceding six months – the softest pace of growth seen since mid-2013.
But we think that only some, if any, of this employment slowdown reflects a broader economic weakening. Another interpretation is that, with the employment rate at its joint highest level since records began in 1971, the labour market is running up against supply constraints. Businesses might instead be looking to meet demand for employees by increasing hours – the number of average hours worked per week (32.4) has reached its highest level since 2002, while the proportion of part-time workers looking for full-time work has fallen to a fresh post-financial crisis low. We do see a jobs slowdown in prospect because we expect higher inflation to weigh on economic growth – but this effect will probably take more time to come through. For now, if anything, the degree of slack in the labour market is still diminishing.
Despite signs of tightness in the jobs market, wages remain remarkably soft. Granted, the +2.3% (3m yoy) headline rate of pay growth was a little stronger than we had expected. But that does not represent any pickup from the previous month’s outturn. And, as a better read of the underlying picture, we often prefer to look at private sector wage growth, excluding bonuses. This measure saw a slowing from +2.7% (3m yoy) to +2.4% growth – much softer than the +3.0% local peak seen last November. And the ‘single month’ annual growth rate dropped from +2.5% to +2.1% – the softest growth seen since March last year.
Continued weakness in nominal wage growth has two vital implications for the UK’s economic outlook. First, with inflation on the rise, real incomes are being squeezed. Indeed, annual private sector regular real wage growth is in negative territory (-0.2% y/y – the weakest growth seen since 2014). This squeeze on households is the main reason why we see the economy slowing down over the course of this year. Second, soft wage inflation means that domestic cost pressures are being kept in check. Because the ‘overshoot’ of CPI inflation above the Bank of England’s 2% target is set, we think, to be driven entirely by the temporary effect of past falls in the pound, the MPC will see no reason to raise rates any time soon. Our forecast is for Bank rate to remain on hold at 0.25% for the whole of this year and next.