UK Reaction: Strong Jobs Growth and Wages to see BoE Hike in August

• Unemployment rate declined to 3.8% in April 2023, above consensus estimates unemployment rising to 4.0%.
• A pickup in employment drove the decline in unemployment and was somewhat offset by a continued increase in economic activity. Employment rose by 250,000 over the quarter, above consensus estimates of a 162,000 rise.
• The drop seen in last month’s HMRC payrolls figure was revised up sharply. HMRC payrolls for April were revised up to 7,000 (from -135,000 prior) and the May figure rose by 23,000. The revision means that payrolls figures are no longer pointing to the moderation in employment that would have been needed to see the Monetary Policy Committee (MPC) pause its hiking cycle in June.  
• Wages growth picked up in April rising to 7.2% above consensus estimates of a rise to 6.9%.
• Strong jobs growth and elevated wages will keep the Bank of England (BoE)’s concerns of inflation persistence front and centre. We raise our expectations for the terminal rate from the BoE, now seeing 25 basis points (bp) hikes in June and August bringing Bank rate to 5%.

The UK unemployment rate declined unexpectedly to 3.8% in April 2023 (consensus 4.0%) as employment rose by a huge 250,000 despite the drop in April HMRC payrolls pointing to the potential for a softer employment number. Wage growth also remained elevated, rising to 7.2% and can in part be explained by the 9.7% increase in the National Minimum Wage (NMW) seen in April, but will keep the BoE’s concerns of inflation persistence front and centre. We raise our expectations for the terminal rate from the BoE, now seeing another 25bp hike in August following June bringing Bank rate to 5%.

Employment rose by 250,000 over the quarter, above consensus expectations of a 162,000 rise in employment and counter to the signal from HMRC payrolls of a moderation in employment. The increase was split evenly between an uptick in employees (+120,000) and self-employment (+117,000). In terms of hours, the increase in jobs was split between full-time employment (+132,000) and part-time employment (+118,000). The drop seen in last month’s HMRC payrolls figure was revised up sharply. HMRC payrolls for April were revised up to 7,000 (from -135,000 prior) and the May figure rose by 23,000. The reversal of the sharp slowdown highlights the revision-prone nature of the HMRC statistics, and more importantly means that payroll figures are not pointing to the sharp moderation in employment that we were pencilling in based on last months figures, and would have been needed to see the MPC pause its hiking cycle in June.

The economic inactivity rate continues to decline as workers who left the workforce over the pandemic continue to gradually return to the labour force. Inactivity declined to 21% and was down 0.4 percentage points (ppt) on the quarter. Recent moves were driven by a decline in inactivity due to looking after family/home (-57,000). Long-term sickness, likely exacerbated by pressures in the National Health Service, also continues to rise (+35,000). Whilst the level of inactivity is now just 240,000 higher than it was prior to the pandemic, inactivity due to long term sickness is higher by 479,000. Overall, the inactivity rate now stands 0.8ppt higher than it was prior to the pandemic (Dec-Feb 2020), but the trend of rising activity is going some way to reverse this trend and improve supply in the labour market but the MPC cannot rely on this to ease the tightness in the labour market.

Vacancies continue to moderate, declining by 79,000 in the quarter to May 2023 to 1.1 million – its 11th consecutive quarterly decline and the largest drop in percentage terms (down 7%) since the first lockdown in 2020. The level of vacancies still remains high when compared to historic levels – vacancies are 1.3 times their levels just prior to the pandemic (Dec-Feb 2020) but firms continue to reduce vacancies reflecting uncertainty across industries, with economic pressures cited as a key concern for holding back on recruitment. 

Wages pressures are showing little sign of abating. As a key measure of the balance of supply and demand in the labour market the evolution is wages is closely watched by the MPC. Consensus forecasts expected a rise in wages, but wages picked up at a much faster pace. In April, NMW increased by around 9.7% but reports also suggested many firms had provided pay rises to workers above these levels so we had seen risks to the upside. Average earnings (excluding bonuses) rose to 7.2% above consensus expectations of a rise to 6.9% from 6.7% in March. Looking at private sector earning (ex-bonuses), they rose to 7.9%. Overall, the BoE had expected private sector wages to moderate to 6.3% in Q2 and just one month into this quarter it looks like this will be an extremely tall order. This adds to other data sources suggesting that upward pressure on wages is likely to persist. For example, the Indeed wage tracker rose to its highest level on record (going back to 2019) in May as wages for new postings continue to rise.

We have had tentative indication that the labour market is cooling as vacancies fall back and other indicators of labour demand such as the Recruitment & Employment Confederation survey signals labour demand has turned. But we have yet to see a consistent sign of moderation in employment in employment data and current developments will not be enough for the MPC to be confident that policy is sufficiently restrictive. Despite the developments, the evidence that the labour market has moderated is far from conclusive as job growth remains resilient and pay growth remains elevated.

This labour market data will do little to abate the BoE’s fears of inflation persistence. We continue to expect the BoE to hike Bank Rate by 25bp at its next meeting on June 22, bringing Bank rate to 4.75%. We now think the Bank will need to go further and pencil in another 25bp hike in August to 5%. The risks to our call remain skewed to the upside given the continued tightness of the labour market, and developments in the upcoming labour market and inflation data remain central.