Local labour market shows slower growth

Apr 24, 2024

The UK labour market is exhibiting signs of a slowdown as recent figures show an increase in unemployment and a dip in employment rates. Between December and February, the unemployment rate rose to 4.2%, marking a six-month high. Concurrently, the employment rate decreased, and the number of economically inactive individuals, those neither working nor actively seeking employment, increased.

BoE's potential policy response
Economists believe this data could prompt the Bank of England (BoE) to lower interest rates this summer. The sharp decline in employment and the rising unemployment rate may lead to subdued wage growth, potentially justifying a rate cut as early as June. Similarly, economists anticipate that these labour market conditions will keep the Bank on track for a rate reduction in the coming months.

The Office for National Statistics (ONS) reported that the unemployment rate increased from 3.9% in the previous three months to 4.2%, surpassing economists' expectations of a rise to 4%. The total number of unemployed individuals stood at 1.4 million during this period. Despite a slight decrease in average wage growth, excluding bonuses, from 6.1% to 6%, wages remained significantly above forecasts. When accounting for inflation, real wages experienced a growth of 1.9% in the three months leading up to February, the highest since September 2021.

Chancellor Jeremy Hunt highlighted the increase in real wages and pointed to the Government's recent cut in National Insurance (NI) for both employed and self-employed individuals, effective from 6 April, as a positive step that should soon be felt by workers. However, he cautioned that the freeze in income tax thresholds until 2028 means higher earners may end up paying more tax as their wages increase. The BoE closely monitors wage growth for its implications on inflation, which needs to be controlled to stay within the 2% target.

Challenges in economic activity
Despite a record inflation peak of 11.1% in October 2022, the rate has since fallen to 3.4% in February, with expectations of a further decline in the March data. Nevertheless, the persistent risk of wage-driven inflation remains a concern for policymakers.

While headline inflation appears set to meet its target soon, high wage growth could push inflation up again, indicating ongoing concerns within the BoE. Conversely, the current labour market conditions could encourage the Bank's monetary policy committee to start reducing interest rates this summer.

The employment rate declined to 74.5%, and the proportion of 16 to 64-year-olds classified as economically inactive rose from 21.8% to 22.2%, equating to 9.4m people. The ONS advised caution in interpreting these figures due to the reduced sample size of household questionnaires used since the COVID-19 pandemic.

Job vacancies also decreased by 13,000 between January and March to 916,000, though still higher than pre-pandemic levels. The rise in economic inactivity was particularly noted among individuals aged 16 to 34, with students and those suffering from long-term illnesses, such as severe COVID-19, contributing significantly to these numbers.

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