UK unemployment fell unexpectedly after companies stepped up hiring, a sign of underlying strength in the economy that complicates the Bank of England’s shift toward lower interest rates.
The jobless rate fell 0.2 percentage points to 4.2% in the three months to June, the Office for National Statistics said Tuesday. Economists had expected a small increase. Employment surged by 97,000, much stronger than the 3,000 increase that forecasters had expected. Wage growth slowed in line with expectations.
While economists noted questions about the reliability of the ONS’s Labour Force Survey, which underpins the unemployment data, investors interpreted the figures as a potentially inflationary sign of strength in the economy. The headline unemployment rate is below the BOE’s forecast for 4.4% in the second quarter.
The pound jumped 0.3% to trade above $1.28 on Tuesday, making the UK the best performing currency in the Group of 10 nations. It contrasts with the situation in the US, where weak jobs data rattled markets in recent weeks. Figures due later this week are likely to show robust economic growth in the UK and the first increase in inflation this year.
“Investors may raise questions about a weak US labor market and anemic euro area GDP growth, but the UK seemingly faces neither problem,” said Andrzej Szczepaniak, a senior economist at Nomura. “Still strong labor market data in the UK as well as still strong activity data support our house view of divergence between the Fed and BOE.”
Employment rose across the board, with only 16 to 17-year olds registering a material decline over the quarter. The number of employees on company payrolls rose more than 24,000 in July, more than double the increase economists had forecast, according to real-time data derived from administrative data.
Separate data showed regular wage growth cooled to 5.4%, down from 5.8% in the previous period. It was the weakest year-on-year pay increase since the summer of 2022. Total pay growth, which includes bonuses, dropped sharply to 4.5%, down from 5.7%. This was largely driven by a one-time bonus paid to National Health Service staff last year.
BOE officials had been focused on the wage figures for signs of inflation but also are looking at the ability of the broader jobs market to drive up pay and prices.
What Bloomberg Economics Says…
“Private sector regular pay growth cooled again in June and is on course to fall below 5% in upcoming data releases. The figures support the case for more easing from the Bank of England this year, though the downside surprise in the unemployment rate flags the risk that the jobs market could start to tighten again if the economy continues to recover quickly. That’s likely to keep the BOE cautious — we think it will take the next step lower in November.”
—Dan Hanson, senior economist. Click for the REACT.
A raft of UK economic data this week will set the tone for the BOE in the leadup to its next policy decision on Sept. 19. Investors are betting on the next cut arriving in November, but BOE officials have said they’ll move carefully while they assess the strength of domestic price pressures in the economy.
“The concern for the BOE will be the signal the data is sending about the underlying strength of the labor market,” said Stuart Cole, head macro economist at Equiti Capital. “With tomorrow’s CPI data also expected to show inflationary pressures starting to creep upwards again, once everything has been digested the market conclusion may well be that a further rate cut being seen this year is not a done deal yet.”
Inflation figures due out on Wednesday are likely to show the first increase in price pressures this year, and a much stronger reading could undermine the case for a further loosening from the BOE.
Some officials have signaled their lingering concerns over strong wage growth. Catherine Mann — who was among four hawkish rate-setters to oppose a change earlier this month — warned on Monday that an “upward ratchet” in wages and prices will “take a long time to erode away.”
“If you look more closely, the fall has been driven by public sector pay rather than private pay, which is the one the BOE is likely most worried about,” said Evelyne Gomez-Liechti, a strategist at Mizuho. “Mann already warned yesterday that the ‘upward ratchet’ in wages and priced will take ‘a long time to erode away’. It sounds like today’s data is unlikely to change her vote.”
There were some signs of a loosening labor market in the vacancies data with job openings edging down to 884,000. It was the lowest since mid-2021. The report also showed:
- Regular private sector pay growth — which is being watched closely by the BOE for signs of domestic pressures — cooled to 5.2%, down from 5.6%. It was the lowest in over two years.
- The employment rate edged up to 74.5%, the highest since the first quarter.
- About 100,000 working days were lost to industrial action in June, due to strikes in the healthcare sector. That’s up from 51,000 in May.
- Household finances continued to be bolstered by pay rises outstripping inflation. Real wage growth remained at 3.2%, the highest since 2021.
BOE officials have also been wary over interpreting the jobs data after the ONS temporarily suspended its Labour Force Survey last year. It is in the process of overhauling the survey but the introduction of new “transformed” figures has been delayed until next year.
The central bank expects unemployment to hit 4.8% in the coming years, remaining below the peaks seen in the pandemic and financial crisis.
“Despite the decline in the unemployment rate, we doubt today’s release will move the needle too much for the Bank of England,” said Ruth Gregory, deputy chief UK economist at Capital Economics. She said it is “difficult to know how much weight we should place on these figures” due to concerns over the accuracy of the data.
