Are Brexit fears dampening jobs gains?

16 Jul 2019

Phil Shaw

Investec Chief Economist

Rate of unemployment holds steady but firms reluctant to hire new workers as fears rise of leaving EU without a deal

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Labour market data for May showed that the rate of UK unemployment held steady at four decade lows of 3.8%, in line with consensus and Investec estimates. At the same time, there was evidence that low jobless rates resulted in a further strengthening in pay growth. The increase in weekly earnings rose to 3.4% (3m yoy) from 3.2% in April (consensus and Investec 3.1%). Perhaps more tellingly, wage gains hit recent records after bonus payments were stripped out.
Regular earnings growth firmed to 3.6% from 3.4% (consensus and Investec 3.5%), while the rate of private sector regular pay strengthened a touch to 3.7% - both of these measures are approaching 11-year highs, the period just ahead of the global financial crisis. A couple of factors appear to have supported the earnings figures. Increases in the National Living (and Minimum) Wage rates were one factor, while the earlier timing of some National Health Service pay increases supported the public sector figures. Even so, pay does appear to be on a genuine, albeit modestly, higher trend.

Job numbers present slow uptick 

Meanwhile though tentative indications of a slowdown in labour market conditions last month were again evident. Jobs rose by a relatively low 28k during the three months to May. For context, the increase over the year was 354k.
Moreover, this figure was bolstered by a 123k increase in self-employment - the number of employees fell back by 85k. Additionally, the number of vacancies slipped back by 19k to 827k over calendar Q2, a low for over a year.
the number of vacancies slipped back by 19k to 827k over calendar Q2

The reasons behind the labour market movements

Our thoughts are as follows. The upward trend in pay growth suggests strongly that there is still a link between unemployment and wage trends. Indeed we maintain that, contrary to some claims, the so-called ‘Phillips Curve’ relationship has not broken down. Rather it has shifted in the post-crisis era, as factors such as supply-side reforms have increased labour supply and put downward pressure on earnings.
Second, the downward trend in unemployment, if maintained, will continue to support wider growth in the economy via household spending. Indeed real wage gains of 1.4% (ONS calculations using the CPIH inflation measure) should be considered together with employment gains (1.1% in the year to the three months to May).
Third, as explained above, some of the key labour metrics are beginning to look a little more fragile. This could be a reflection of the volatility of the data. But we suspect that there is an element of Brexit uncertainty here, namely that faced with the possible uncertainty of leaving the EU without a deal, firms are becoming more reluctant to commit to hiring new workers.
This has been a factor in terms of business investment for over a year now and our suspicion is that this negative sentiment is beginning to spill over into the labour market. 
Last, the level of sterling had recently become a touch more sensitive to domestic economic indicators and the outlook for monetary policy. However, the pound fell back early this morning on negative Brexit related reports. The UK currency took little notice of today’s figures, including the firm pay data and continues to languish at $1.2450 and 90.2p against the euro. This is an indication that in terms of currency drivers, domestic fundamentals have once again begun to give way to Brexit issues. 

About the author

Philip Shaw

Philip Shaw

Chief Economist, UK

Philip graduated with an Economics degree from Bath University and a master’s in Econometrics from the University of Manchester. He is a regular commentator on the economy and financial markets in the press and on TV. Philip joined Investec in London in 1997 and heads up the Economics team there.

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