Labour market shows signs of stabilising, raising questions
Today蜜桃传媒檚 data suggests the labour market could be stabilising after April蜜桃传媒檚 big rise in employment costs. The unemployment rate steadied at 4.7% in July after three consecutive rises and the official measure of employment remained strong. Granted, both payrolls and vacancies fell again, but by significantly smaller margins than in recent months. In the private sector, pay growth fell only slightly. The Monetary Policy Committee (MPC) will need to see faster weakening in private sector pay over the coming months if it蜜桃传媒檚 to justify another 25bps cut in November. For now, we maintain our view that there蜜桃传媒檚 scope for another 25bps cut then. However, we don蜜桃传媒檛 think it蜜桃传媒檒l take much to convince the MPC to hold rates at 4% in Q4.
LFS improves, but payroll and vacancies data complete UK jobs story
The Office for National Statistics (ONS) continues to improve the Labour Force Survey (LFS), which is where its headline measures of employment are derived from. But, the LFS remains distorted by its low response rate. We therefore take Q2蜜桃传媒檚 huge 238,000 gain in employment and resulting stabilisation in the unemployment rate at 4.7% with a hefty pinch of salt.
Instead, we look towards payrolls and vacancies to give us a full picture of what蜜桃传媒檚 happening in the labour market. Both measures fell, by 8,000 and 7,000 respectively, in July as the labour market continued to ease. However, these declines were smaller than some of the huge drops we蜜桃传媒檝e seen over the last few months. What蜜桃传媒檚 more, payrolls are subject to large revisions. We therefore think there蜜桃传媒檚 a good chance July蜜桃传媒檚 fall in payrolls ends up as a gain once the ONS revises the data next month.
Overall, we think the labour market is starting to stabilise as firms finalise their adjustments to the big increase in employment costs from the Autumn Budget.
MPC: UK payroll trends enough to ease wage growth?
During last week蜜桃传媒檚 press conference to announce the latest interest rate decision, the rationale and forward guidance, Bank of England (BoE) Governor, Andrew Bailey, said 蜜桃传媒渢he one thing that is apparent is that pay has come in lower than we thought it would蜜桃传媒. However, the MPC may need to look elsewhere to justify another rate cut in November as private sector wage growth (excluding bonuses) 蜜桃传媒 the measure the MPC cares most about because it best captures domestic inflationary pressures 蜜桃传媒 came in at 4.8% in June, down only slightly from 4.9% in May. This is still well above the 3% that the MPC thinks is consistent with 2% target.
Today蜜桃传媒檚 data also means the more dovish members of the MPC won蜜桃传媒檛 find the evidence they蜜桃传媒檙e looking for in the whole economy to counsel for further interest rate cuts, either. Average Weekly Earnings fell to 4.6%, but held steady once you exclude bonuses (AWE, excluding bonuses) at 5% in June.
We still expect pay growth to continue trending down over the rest of the year, but early signs of a stabilisation in labour demand could mean pay growth continues to ease only gradually. This could provide a tailwind to consumer spending as households continue to feel the benefits of growing real incomes, despite inflation heading towards 4%.
Could the latest labour market data justify one more 2025 rate cut?
Today蜜桃传媒檚 data continues to point to a cooling labour market. However, there was no evidence of the feared-for rapid weakening in the jobs market, which has been keeping the MPC蜜桃传媒檚 doves up at night. If anything, we see signs that the labour market will stabilise over the second half of the year, which could make future MPC meetings more straightforward than the one this month.
Crucially, pay growth remains far too strong to return inflation to 2% and looks to be easing only gradually. Indeed, the MPC蜜桃传媒檚 hopes for a pacier moderation in wage growth will likely fade if the labour market stabilises.
Ultimately, today蜜桃传媒檚 data raises obstacles on the path to another interest rate cut in November. We蜜桃传媒檇 already thought the figures were starting to prove more hawkish than policymakers expected and the MPC蜜桃传媒檚 latest forecasts confirm as much.
Inflation will hit 4% in September and, without a faster weakening in the labour market, we think the doves won蜜桃传媒檛 have enough ammunition to force through a fourth rate cut this year, especially if a range of stagflationary duty hikes prevent inflation falling below 3% next year.
For now, we continue to expect another interest rate cut in November, which would leave interest rates at 3.75% by the end of the year, but this call hangs in the balance.
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