The latest UK labour market report pointed to further gradual weakness, though the figures are highly unlikely to materially move the needle in terms of the BoE policy outlook, while reinforcing the ‘stagflationary’ backdrop which now dominates the UK economic discourse.
Unemployment, in the three months to November, rose to 4.4%, in line with market expectations, and the highest level since May 2024.
There is, however, frankly little use in looking too closely at the figures as, despite spending over £40 million ‘transforming’ the labour force survey, the ONS’ data remains littered with uncertainty, amid an incredibly low survey response rate, hence lessening the weight that policymakers place on the data.
Meanwhile, over the same period, overall earnings rose by 5.6% YoY, the fastest such pace since last May, while regular pay (excluding bonuses) also rose by 5.6%% YoY, the fastest rate since last June.
These figures are likely to have been boosted by an unfavourable base effect stemming from relatively soft pay growth this time last year, along with the continued impact of last summer’s above-inflation public sector pay increases feeding into the data. In any case, earnings growth remains at a clip that is, clearly, incompatible with a sustainable return to the Bank of England’s 2% inflation target over the medium-term.
Speaking of which, this morning’s report seems unlikely to substantially alter the Old Lady’s policy outlook. A 25bp Bank Rate cut in early-February remains nailed-on, after the marginally cooler than expected December CPI figures released last week. Beyond that, the MPC are likely to offer little by way of explicit guidance in terms of further easing, though a predictable pace of quarterly 25bp cuts, amounting to a total of 100bp of easing this year, remains my base case for now.
That said, were the labour market to loosen in more rapid fashion, particularly as the impacts of the employer National Insurance hike are felt in Q2, risks to the above base case would tilt in a more dovish direction. Increased slack in the labour market could, in turn, exert further downward pressure on stubbornly high services inflation, which could well permit a faster pace of BoE easing in the second half of the year.
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