Despite stuttering economic activity, employment growth is strong but it is still failing to translate into higher earnings growth
By Howard Archer, Chief Economic Advisor to the EY ITEM Club
The UK labour market shows robust improvement, despite faltering economic activity. This is not good news for already worryingly weak UK productivity. However, it does provide some much-needed respite for consumers as they face a serious squeeze on purchasing power.
Employment at new record high
The number in work rose by 175,000 in the three months to May to a record 32.010m, pushing the employment rate up to an all-time high of 74.9%. Meanwhile, a 64,000 fall in unemployment to 1.495m sent the Labour Force Survey (LFS) jobless rate down to 4.5%, a rate last seen in 1975. Job vacancies remained elevated at 774,000.
It may be that a number of UK companies are currently keen to take on workers or at least hold on to them given concerns over labour shortages in some sectors and reports of fewer EU workers coming to the UK since last June's Brexit vote.
However, the strong suspicion remains that sooner or later UK labour market resilience will be diluted by weakened UK economic activity, heightened business uncertainties and concerns over the economic and political outlook, including Brexit developments. Indeed, business caution appears to have been reinforced by political uncertainty following the general election and this increases the downside risks to employment.
Earnings growth remains muted
Worryingly for consumers, higher employment is still not translating into higher pay as inflation ratchets up further. Thus the squeeze on consumers continues to intensify, with obvious negative implications for personal expenditure.
Anaemic earnings growth is a key factor arguing against any near-term Bank of England interest rate hike, and the latest data keeps this argument firmly in place – along with recent largely disappointing UK economic developments.
With inflation on the up, the ONS reports that real average weekly earnings decreased by 0.7% including bonuses. This was the fastest drop in total real average weekly earnings since mid-2014.
There was a slight pick-up of 2% in the three months to May in annual growth in regular pay (which excludes bonus payments) but this was not enough to materially change the situation. True, regular pay growth picked up to 2.3% in May itself from 1.8% in April, but this was helped by a dip in earnings growth in May 2016. Real earnings fell by 0.5% excluding bonuses in the three months to May.
Companies are clearly keen to limit pay as they face a faltering domestic economy and as their input costs have been lifted markedly by the sharp overall weakening of the pound.
Broadbent stance dilutes prospect of near-term Bank of England interest rate hike
In a significant development for the future levels of interest rates, Ben Broadbent has nailed his flag to the no change mast for the time being. While Broadbent acknowledged that there is reason to see the MPC moving in the direction of increasing interest rates, he noted that there is still too much business caution and that he would have expected to see faster growth in the economy.
Current stuttering UK economic activity, ongoing weak earnings growth and economic, political and Brexit uncertainties over the outlook provide a pretty strong case for the Bank of England to hold off from hiking interest rates in the near term at least. Additionally, recent lower oil prices and a relatively stable pound have diluted some of the upside inflation risks.
We maintain the view that a Bank of England rate hike is unlikely this year.