Full-Time Employment Falling in the UK

Summary

• On net, May (ONS) and June (HMRC) data was dovish for the UK labour market on the back of declining full-time employment and continued normalisation in activity rate.
• Wages however, remain hawkish. Some comfort may be found in slowing wage growth (MoM), but it remains premature to draw any conclusions there.
• The labour market loosening will dominate the tone ahead for the BoE if it continues (surveys suggest it will).
• We now lean towards explicitly fading the BoE terminal rate (we had been holding off until the data turned).
• Inflation next week will be a risk to the dovish outlook, but given market pricing the risk/reward is skewed now towards a stronger market reaction from a miss, rather than a beat.

On net, May (ONS) and June (HMRC) data was dovish for the UK labour market. Wages however, remain hawkish. Some comfort may be found in slowing wage growth (MoM),  but it remains premature to draw any conclusions . Instead, the loosening in labour market tightness (declining full-time employment and rising unemployment) will become the more important factor.

The market is taking back some of its BoE hawkishness, but we’re still priced for a further 125bp of hikes to the end of the year. We now lean towards it being a good opportunity to explicitly fade the BoE terminal rate (we had been holding off until the data turned).

 Although the labour market data does not yet represent a complete capitulation from the positive surprises that drove the BoE’s 50bp hike, it confirms the underlying weakness we have been warning of for some time. Inflation next week will be a risk to a dovish outlook, but given market pricing the risk/reward is skewed now towards the stronger market move coming after a miss, rather than a beat.

The Labour Market Loosening Continues

The UK unemployment rate’s decline was short-lived, with the May ONS numbers providing  another leg higher to 4.0%. Note: BoE forecasts have it below 4.0% until the end of 2024.

The proportion of unemployment people to job vacancies (a number closely tracked by the BoE) is now at 1.3x – the highest it has been since August 2021, 0.4 above its base in August 2023, and just 0.2-0.3 from the level it was in 2019. Surveys suggest that this loosening will continue ahead (although they’ve been diverging from hard data for some time, Chart 1).  

Employment Slowing, Activity Rate Rising

Employment growth is quickly losing momentum. HMRC payroll numbers fell 9k on the month (although we know to be wary of these given revisions). More importantly, the momentum in ONS full-time employment numbers is sharply down. 3MMA YoY change in FT employment is now negative (Chart 2). This continues a long trend of loosening, but the shift this month was quite dramatic.

PT employment is meanwhile slowing – it has been a lot more volatile since COVID. The long-term trend of FT->PT we have previously warned about is a sign of concern for the labour market. Elsewhere, activity rate has picked up again to 63.7% (+0.1pp MoM). While this may seem a marginal change, it shows that the normalisation of activity continues.

Wages Supported in Bonus and Regular  

As ever, the fly in the dovish ointment were the headline wage growth numbers. 3MMA YoY total earnings moved another leg higher to 6.9% (+0.2pp MoM), while regular pay growth rose to 7.3% (unch). Revisions to last month’s data were also positive (above MoM changes are to the revised numbers).   Much of this, has to do with the strength in the April numbers. The May numbers were less strong by comparison.

Surveys Suggest Wage Slowing – Hard Data Resilient

The BoE cares a lot about private sector wage growth (for why, see here). As such, the slight YoY slowdown from April to May will come as a welcome outturn. Although there will need to be more data confirming this before they take much comfort from it.

However, as we have warned previously,  as the labour market  loosens, the relative importance of wage growth declines. While private wages provide a cost impulse to inflation, the recent moderation in wage-intensive service inflation suggests to us that demand-driven inflation is also playing a strong role. On this, the total aggregate income for the economy will be the most important part rather than the momentum in median wage growth.

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

Photo Credit: depositphotos.com

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