The unexpected drop in the UK unemployment rate combined with rising GDP signals a strengthening economy—unlike the US
Britain’s unemployment rate unexpectedly fell after companies boosted hiring, a sign of underlying economic strength that makes it harder for the Bank of England to move to lower interest rates.
The unemployment rate fell 0.2 percentage points to 4.2% in the three months to June, the Office for National Statistics said on Tuesday. Economists had expected a small increase. Employment jumped by 97,000, much stronger than the 3,000 gain forecast by forecasters. Wage growth slowed in line with expectations.
While economists have raised questions about the reliability of the ONS Labour Force Survey, which forms the basis for unemployment data, investors have interpreted the figures as a potentially inflationary signal about the strength of the economy. The official unemployment rate was lower than the BOE’s forecast of 4.4% in the second quarter.
Sterling rose 0.3% to above $1.28 on Tuesday, making the UK the best performing currency in the Group of 10. That contrasts with the situation in the US, where weak jobs data has rattled markets in recent weeks. Figures due later this week are likely to show strong economic growth in the UK and the first rise in inflation this year.
“Investors may be concerned about the weak US labor market and weak eurozone GDP growth, but the UK does not appear to be facing any problems,” said Andrzej Szczepaniak, a senior economist at Nomura. “The UK’s still-strong labor market data and still-strong activity data support our view of the divergence between the Fed and the BOE.”
Employment rose across the board, with only the 16- to 17-year-old age group recording a significant decline in the quarter. The number of employees on corporate payrolls rose by more than 24,000 in July, more than double the increase economists had forecast, according to real-time data collected from administrative data.
Separate data showed regular pay growth fell to 5.4%, down from 5.8% in the previous period. This was the weakest annual pay rise since the summer of 2022. Total pay growth, including bonuses, fell sharply to 4.5%, down from 5.7%. This was largely due to a one-off bonus paid to National Health Service staff last year.
BOE officials are focusing on wage data for signs of inflation but are also looking at the broader job market’s ability to boost wages and prices.
What Bloomberg Economics says…
“Regular private sector wage growth cooled again in June and is on track to fall below 5% in upcoming data releases. The figures support the case for further easing from the Bank of England this year, although the surprise decline in the unemployment rate signals a risk that the jobs market could start to tighten again if the economy continues to recover rapidly. That is likely to keep the BOE cautious — we think they will take the next step lower in November.”
—Dan Hanson, senior economist. Click to see REACTION.
A slew of UK economic data this week will shape the BOE’s outlook ahead of its next policy decision on September 19. Investors are betting on the next cut coming in November, but BOE officials have said they will proceed cautiously while assessing the strength of domestic price pressures on the economy.
“The BOE’s concern will be the signal the data is sending about the underlying strength of the labor market,” said Stuart Cole, chief macro economist at Equiti Capital. “With tomorrow’s CPI data also expected to show inflationary pressures starting to pick up again, once that’s digested, the market’s conclusion may be that the further rate cuts seen this year are not a done deal.”
Inflation figures due out on Wednesday are likely to show rising price pressures for the first time this year and a much stronger figure could weaken the case for further policy easing by the BOE.
Some officials have signaled their continued concerns about the sharp rise in wages. Catherine Mann — one of four hard-line rate-setters who opposed the change earlier this month — warned on Monday that the “spikes” in wages and prices would “take a long time to clear.”
“If you look closely, the decline is driven by public sector wages, not private wages, which is what the BOE should be most concerned about,” said Evelyne Gomez-Liechti, a strategist at Mizuho. “Mann warned yesterday that the ‘upward push’ in wages and prices would ‘take a long time to erode.’ It seems unlikely that today’s data will change her vote.”
There were some signs of a tightening labor market in the job vacancy data, with job openings falling to 884,000, the lowest since mid-2021. The report also showed:
- Regular private sector wage growth – which the BOE is closely watching for signs of domestic pressure – fell to 5.2%, down from 5.6%, its lowest level in more than two years.
- The employment rate rose to 74.5%, the highest since the first quarter.
- About 100,000 workdays were lost to strikes in June, due to strikes in the health care sector. That’s up from 51,000 workdays in May.
- Household finances continued to be bolstered by wage growth that outpaced inflation. Real wage growth remained at 3.2%, the highest since 2021.
BOE officials have also been wary of interpreting employment data after the ONS temporarily suspended its Labour Force Survey last year. They are in the process of overhauling the survey but the release of new “transition” figures has been delayed until next year.
The central bank expects unemployment to reach 4.8% in the coming years, still below its peak during the pandemic and financial crisis.
“Despite the fall in unemployment, we doubt today’s release will have too much of an impact on the Bank of England,” said Ruth Gregory, deputy chief UK economist at Capital Economics. She said it was “difficult to know how much weight we should put into these numbers” due to concerns about the accuracy of the data.
