UK labour market remains tight despite a welcome drop in inactivity

Chris Scicluna
Emily Nicol

UK job growth picks up again with unemployment steady
The latest UK labour market data were a mixed bag, suggesting some favourable developments from both cyclical and structural perspectives, albeit flagging the intensifying hit to living standards from high inflation. To start, in the three months to May, the unemployment rate was unchanged at 3.8%, which thankfully meant that the big (0.6ppt!) increase in the (typically volatile) single-month measure reported in April was fully reversed the following month. Moreover, the steady unemployment rate over the three months masked a chunky pickup in employment, with job growth over that period accelerating to an eight-year high of 296k, the strongest in eight years, benefiting from increases in both full-time and part-time work. The total number of people in work, however, remained 210k below the pre-pandemic level, in part due to the continued shortfall of self-employed workers.

Welcome fall in labour inactivity but further to go to ease tightness in the job market
The strong growth in employment did not lower the unemployment rate, as the three-month inactivity rate fell back 0.2ppt on the month and 0.4ppt from three months earlier as many workers returned to the labour force – a particularly welcome structural development. Notably, however, the inactivity rate remained some 0.9ppt below its pre-pandemic level, suggesting still some way to go to return to a “normal” labour supply. And while the redundancy rate dropped to a record low in the three months to May as firms sought to hoard labour despite the uncertain economic outlook, more recent data pointed to a softening of job hiring momentum in June, with the estimate of payrolled employees (a figure that is typically revised down significantly) up just 30.7k, down slightly from May to be the second-smallest increase over the past fifteen months. And while the number of job vacancies reached a new high of 1.294mn, slightly the above the number of unemployed workers to suggest that the BoE will still be concerned about the continued tightness of the labour market, the pace of increase continued to slow.

Pay growth too firm for the BoE’s comfort despite record drop in real-terms regular earnings
Finally, while growth in employees' average total pay in May slowed 0.6ppt to 6.2%3M/Y, the moderation reflected an easing in the pace of bonus growth. Indeed, growth in regular pay (excluding bonuses) inched up 0.1ppt to 4.3%3M/Y. With those rates only slightly exaggerated by base effects associated with furlough, the BoE will still consider pay growth to be somewhat above levels consistent with achievement of the inflation target. But given sky-high inflation, they are also consistent with big cuts in purchasing power. Indeed, real total pay was down 0.9%3M/Y and real regular pay fell at a record pace of 2.8%3M/Y, rates that seem bound to worsen over the near term and suggest that private consumption growth will be weak over the remainder of the year. BoE Governor Andrew Bailey might have something to say about this sorry state of affairs when he delivers his annual Mansion House speech this evening, but he seems unlikely to shy away from signalling further (and probably more aggressive) monetary tightening ahead.

Euro area inflation data to confirm the record high in June, but core CPI temporarily eased back on government policy measures
This morning will bring the final estimates of euro area CPI inflation in June. With the national figures having aligned with the preliminary releases, today’s estimate of euro area headline HICP inflation is set to confirm the 0.5ppt increase to a record high of 8.6%Y/Y. But reflecting German policy measures to reduce the cost of public transport, and summer discounting on clothing, core inflation is expected to align with the flash estimate, which declined 0.1ppt to 3.7%Y/Y. This release will also provide the full component breakdown allowing for more granular analysis.

Euro area construction activity to remain weak; ECB lending survey to signal tightening credit conditions
Euro area construction activity numbers for May will also be published this morning. Equivalent figures for Germany and France (up 0.4%M/M a piece) suggest modest growth that month. But this would reverse less than half the 1.1%M/M drop in April, to leave it trending below the Q1 average. Separately, the ECB will publish tomorrow its latest quarterly bank lending survey for Q2, which will likely report a tightening of lending conditions amid expectations of imminent monetary tightening.

US housing starts likely to remain subdued
Following yesterday’s disappointing NAHB survey – which saw the headline home builders index fall sharply to its lowest level since May 2020 – today’s housing starts release for June seems bound to be subdued. Indeed, elevated inventories and the prospect of slowing sales are expected to have seen builders trim single-family housing starts for the sixth month out of the past seven. 

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