UK Labour Market – Unemployment Rate Rises on Participation, Details Still Bearish

Summary

• The release sustains UK bearishness. Vacancies dropped, PAYE employment continued declining, wage growth undershot MPR.
• The unemployment rate rising is largely immaterial – LFS is a non-credible data source, and it was driven by a jump in the participation rate.
• Our view remains that the labour market is loosening faster than the BoE expects.
• The paring of the severity of May’s PAYE employment decline was expected. We are not in a non-linear deterioration yet, but a slow grind one.
• Questionable quality LFS employment remains very strong – it is on this the BoE and OBR base their forecasts.
• Job losses in low paying sectors could continue flattering aggregate pay growth numbers.

Market Implications

• Our base case remains for the BoE to cut at least to 3.5% in 2025.
• We are long UK real rates (10Y linkers) and long SFIZ6.

Another Bearish Release – Ignore Unemployment Rate

UK labour market data continues supporting our long-standing view that the UK economy is in trouble, and the BoE must cut rates at least to 3.5% in 2025. The market pared rate-cuts post-release, which we would fade. We still see value being long SFIZ6 and UK linkers.

PAYE data confirmed employment growth is negative YoY, although the scale of this was revised down from May’s release (as we had expected). That LFS employment data was strong should be ignored.

AWE regular pay growth dropped further below May’s MPR, even while more timely PAYE data remains well-supported. It now nears DMP data. The discrepancy in sector pay rises between AWE and PAYE is important.

Employment composition (job losses in low paid sectors) is probably supporting wage growth but is not itself hawkish.

Vacancies declined again and are now decently below end-2019. The BoE will pay attention to this credible number.

The BoE has shifted its take on the labour market to being below equilibrium (from being in balance, previously). We think it is loosening at an increasing (but so far modest) pace. However, we have yet to see the non-linear deterioration some fear.

Our main conclusions are largely unchanged:

• Unemployment is gradually rising, and employment is stagnating/deteriorating.
• Private pay growth remains elevated by historic standards but is slowing – sector composition is flattering the reading.
• Private pay growth is not translating into higher wage-intensive services inflation.

Employment Rate Rises on Participation Change

The ONS LFS unemployment rate rose to 4.7%, above the May’s MPR – we do not put any real weight on the number, but the BoE does (Chart 1). The unemployment count rose again in May (+33k), but it was the 0.2ppt rise in the participation rate that did most of the work, so the rise should not be overstated. Elsewhere, jobless claims ticked higher in June (+26k) while vacancies fell further showing more credible labour market loosening (-11k, Chart 2).

Vacancies now sit 80k below pre-COVID levels (December 2019). As a ratio to unemployment, the decline continued and now sits 20% below pre-COVID levels (Chart 3).

PAYE employment’s decline of 41k adding to the loosening trend in the hard data (Chart 4). May’s initial massive 109k drop was revised down. We expected this to be revised down, but the scale was more than our expectations – we noted -70k looked reasonable but it was revised down to -25k..

There will be revisions to this – the 20k drop in retail employment looks odd, as does the +7k reversal in administration jobs (see appendix). We would not be surprised if the -41k is revised down to nearer -30k, which would be roughly align with the recent trend since the start of the year.

We ignore LFS employment numbers (+134k 3m/3m); it has been non-credible for some time and is increasingly divergent from the PAYE “actual” data (Chart 4). The OBR and BoE forecasts remain focused on LFS, which raises the change that tax revenue and household purchasing power undershoot their respective forecasts.

PAYE data suggests the employment decline is driven not by an acceleration in firing, but in a continued, gradual decline in hiring (Chart 5). Revisions have taken this to around a 25k monthly decline. This is probably more likely to slip under the radar in surveys (not replacing leavers is less dramatic than letting people go).

Pay Growth Slows Again

Wages roughly aligned with market expectations, with total pay growth down to 5.0% and regular pay growth dropping to +5.0%. Regular private pay dropped to +4.9%, a further undershoot versus May’s MPR (Chart 6). More timely PAYE data remains comparatively well supported at 5.8%.

PAYE data shows a diversity in sector pay growth. Public sector pay rose sharply again as did construction, while arts and retail declined (see appendix Charts A1 and A2).

Appendix – PAYE Sector Detail

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. You are not permitted to publish, transmit, or otherwise reproduce this information, in whole or in part, in any format to any third party without the express written consent of Macro Hive. This includes providing or reproducing this information, in whole or in part, as a prompt.)