UK labour market much stronger than expected

Chris Scicluna
Emily Nicol

UK labour market much stronger than expected to raise the likelihood of further significant BoE tightening
This morning’s UK labour market data were significantly stronger than expected, underscoring the likelihood of further significant tightening to come from the BoE. In particular, in the three months to April, employment rose 250k, the most in eleven months, taking the level of employees and self-employed to a series high. While the unemployment rate edged up over the quarter to 3.8%, it had been expected to rise further to 4.0%. And although the number of inactive workers continued to edge lower, long-term sickness continued to rise. Admittedly, there were a few signs of cooling in the labour market, with vacancies down in the three months to May to a two-year low.

However, most importantly for the BoE, pay growth accelerated, with growth in regular pay (i.e. excluding bonuses) in the three months to April up 0.6ppt on the quarter to 7.2%3M/Y, a rate only exceeded once on the series, in June 2021. Moreover, much of the pressure came from private sector regular pay, also up 0.6ppt on the quarter to 7.6%3M/Y, similarly a rate only previously exceeded in the midst of the pandemic. Against the backdrop of widespread strike action, public sector pay growth strengthened too, up 0.7ppt on the quarter to 5.6%3M/Y.

Of course, given high inflation, in real terms wage growth remained firmly in negative territory, at -2.0%3M/Y for total pay. But with core inflation already significantly higher than in other G7 economies, and nominal pay accelerating further above levels that might be reasonably considered consistent with the MPC’s inflation target over the medium term to smack of substantive second-round effects, the BoE appears to have the biggest challenges of all the major central banks. Further rate hikes this month and in August seem inevitable. Indeed, some MPC members (e.g. the externals Mann and Haskel) might be looking to hike by 50bps next week. And even though it would significantly risk inducing recession next year, additional tightening well into the autumn is also looking a reasonable bet.

Japanese survey signals marked improvement in domestic economic conditions and firmer capex intentions
The Japanese government’s business outlook survey today tallied with the broadly upbeat messages of other recent sentiment surveys. In particular, the net share of large firms reporting an improvement in business conditions in the second quarter rose more than 5½ppts to 2.7%, the highest since Q421, with non-manufacturers similarly the most upbeat since end-2021. But while the magnitude of increase over the quarter was larger for manufacturers (up 10ppts), on balance those firms remained marginally downbeat as concerns about external demand continued to weigh. And, as is the norm, the share of small firms considering conditions to have deteriorated continued to outweigh those reporting improvements, albeit notably fewer than in Q1.

Japanese firms on the whole were even more upbeat about recent developments in domestic economic conditions, with the net balance of large firms reporting an improvement (15.2%) the second highest since Q314, while the net balance of small firms was the highest since before in the consumption tax hike in April 2014. Manufacturers and non-manufacturers were more optimistic about conditions this quarter as the sectors continued to benefit from easing supply constraints and the release of pandemic-related pent-up demand. Admittedly, firms were a touch less upbeat about expected domestic conditions through the second half. But on the whole, they expected the overall business outlook to improve steadily as the year progressed.

While firms’ expectations about sales growth for the current fiscal year were little changed from March, forecasting an increase of 2.7%Y/Y, they were more downbeat about expected profits growth, projecting a decline of 4.4%Y/Y, compared with a drop of a little more than 1% in March, with manufacturers and non-manufacturers forecasting a steeper drop. This notwithstanding, firms were more upbeat about their capex intentions, with the projected increase in FY23 of 11.2%Y/Y up from the forecast of 9.1%Y/Y in March and growth of 8.6%Y/Y in FY22, with manufacturers expecting another year of double-digit growth (21.8%Y/Y).

German inflation falls to 15-month low as energy and food prices ease, while services prices impacted by government’s discounted travel pass
Final German inflation figures today confirmed a notable decline in the headline HICP rate in May, by 1.3ppts to a fifteen-month low of 6.3%Y/Y. The national CPI rate was similarly down 1.1ppt to 6.1%Y/Y, the lowest since March 2022. While there was a broad-based easing in price pressures, the drop in energy prices was again notable, down 1.4%M/M, to take the annual rate of that component down 4.2ppts to 2.6%Y/Y, the lowest since February 2021.

Within the detail, while increases in electricity and natural gas remained above norm, they maintained a steady downwards path in May, while prices of heating oil (-30.5%Y/Y) and motor fuels (-14.2%Y/Y) fell sharply. Encouragingly, food inflation remained a significant source of inflationary pressure, it fell a further 2.3ppts to 14.9%Y/Y, not least reflecting a sharp decline in prices of butter (-23.3%Y/Y).

When excluding food and energy, German core inflation fell 0.4ppt to 5.4%Y/Y. That was due principally to an easing in services inflation on the back of the introduction of the government’s discounted rail ticket. Indeed, the annual rate of price increase for short-distance rail tickets slowed considerably in May, by 5.5ppts to 0.6%Y/Y. Net rents also continued to have a dampening effect, which were in part countered by strong inflation for the maintenance and repair of dwellings (+15.8%) and prices for package holidays (+13.6%). Over the summer, core inflation will rebound due to base effects associated with last year’s more heavily discounted rail ticket scheme. But by the autumn, the downtrend in both headline and core inflation in Germany and the euro area should be clear, allowing the ECB to halt its tightening cycle.

US CPI report key focus of the day
As the FOMC’s latest two-day meeting gets underway, all eyes today will be on the US CPI report. Given a further decline in energy prices, Daiwa America economists expect consumer prices to have risen just 0.1%M/M, to leave the annual rate easing 0.9ppt to 4.0%Y/Y, the lowest since March 2021. But core prices are expected to have increased a further 0.4%M/M, reflecting sticky services prices. This would leave core inflation down just 0.3ppt to 5.2%Y/Y.

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