British wages shot up and unemployment fell unexpectedly in April, the latest signs that the resilient UK economy continues to defy efforts to cool demand and dampen inflationary pressures.
(Bloomberg) — British wages shot up and unemployment fell unexpectedly in April, the latest signs that the resilient UK economy continues to defy efforts to cool demand and dampen inflationary pressures.
The unemployment rate dropped to 3.8% in the three months through April, undercutting forecasts for an increase to 4%, the Office for National Statistics said Tuesday. Average earnings increases excluding bonuses rose to the highest ever outside the pandemic.
The data spurred traders to ramp up bets that the Bank of England’s Monetary Policy Committee will keep raising rates. Investors priced in 1.25-percentage-points of hikes to 5.75% this year and see a small chance of an increase to 6% by February. The odds of a 50-basis-point increase at this month’s meeting also increased. Short-term bonds tumbled, with the yield on two-year government notes rising to the highest level since the 2008 global financial crisis.
“The question now is whether the Bank opts for a 25 basis point or 50 basis point move,” George Buckley, an economist at Nomura, wrote in a note to clients. “While ‘no change’ is likely to be discussed by the doves, it feels like it is pretty much off the table in terms of the decision itself.”
The figures are a major surprise because economists and the BOE had expected the labor market to loosen under the pressure of 12 consecutive interest rate increases. Instead, a persistent shortage of workers, many of whom dropped out of the workforce in the pandemic, is driving up wages.
“The UK labor market remains very tight and continues to confound expectations,” said Hussain Mehdi, Macro & Investment Strategist at HSBC Asset Management. “For the Bank of England, wage growth is a big problem – it is simply at too high a level to allow inflation to hit the 2% target.”
The number of people in employment rose to a record 33.1 million during the quarter, surpassing pre-pandemic levels for the first time. All other Group of Seven nations reached that milestone months before the UK.
British companies are struggling to find staff, bidding up pay and bringing down the unemployment rate. There’s a shortage of workers on both ends of the pay scale, from highly technical jobs, such as in finance and IT, as well as positions in hospitality and leisure, which were previously filled by European Union migrants.
Joblessness fell by 25,000 in the quarter through April compared with the three months through March. The number of people classed as inactive — out of work and not looking for a job — fell by 13,000. That contributed to a 94,000 jump in the number of people in employment.
Britain’s economy has continued to grow slowly, despite shocks from Brexit, Covid and Russia’s war in Ukraine, leading analysts to abandon predictions of a recession this year. Still, the BOE is concerned that the economy lacks the workers to grow much without stoking inflationary pressures, leaving it poised to deliver more rate hikes.
“Fierce competition for skills, wage demands and candidates’ expectations leave many businesses with job vacancies they can’t fill,” said Jane Gratton, head of people policy at the British Chambers of Commerce. “Together with broader inflationary pressures, it’s a perilous environment for business.”
What Bloomberg Economics Says …
“Both wage and price pressures are proving stronger than the central bank expected in its May forecast, meaning there is little to prevent the monetary policy committee from lifting rates in both June and August. That would mean a terminal rate of 5%, up from our previous forecast of 4.75%.”
—Ana Andrade, Bloomberg Economics. Click for the REACT.
The wage data echoes findings of the Bloomberg Reed Jobs report, published in collaboration with Reed Recruitment. It found wages across new positions offered in the three months to April were up 10% year-on-year, but that employers are worried enough about the outlook to hold off on investments needed to train people for entry-level positions. Wages were rising rapidly for white-collar jobs in finance and consulting.
Wage growth in April was boosted by a 9.7% increase in the national minimum wage, which was aimed at cushioning the lowest-paid workers from a surge in food and energy prices.
Overall, pay growth excluding bonuses accelerated to 7.2%, the highest ever recorded outside the pandemic. In the private sector, pay is growing by 7.6%, also a record aside from the period distorted by Covid lockdowns.
Chancellor of the Exchequer Jeremy Hunt has vowed to fight inflation, which is eating into the spending power of consumers and delivering the tightest cost-of-living squeeze in generations. “Rising prices are continuing to eat into people’s pay checks – so we must stick to our plan to halve inflation this year to boost living standards,” Hunt said in a statement.
Soaring prices have squeezed household living standards. Real wages adjusting for inflation are still 1.3% lower than a year earlier. That has led to the worst period of industrial strife since the late 1980s.
The number of employees on payrolls rose 22,879 in May, and the large drop in April reported last month was revised away. Payrolls in that month are now estimated to have risen by 6,822.
“The large fall in the payrolled employees number led us all to believe the labor market was finally turning, but it turns out the figures were way out,” said Stuart Cole, chief macro economist at Equiti Capital in London. “If you are a member of the MPC you will likely be pulling your hair out, wondering how you can be expected to steer monetary policy when faced with revisions such as this.”
Investors expect the BOE to keep hiking rates through the summer, starting with a quarter-point increase to 4.75% on June 22. That would be the highest rate since the start of the global financial crisis more than a decade ago.
“Most central banks have a mandate to stabilize inflation with either an explicit or implicit mandate to maintain employment,” said Rishi Mishra, an analyst at Futures First. “If inflation and employment both remain strong, there are no trade-offs. Policy has but one direction to move and that’s higher.”
–With assistance from Elina Ganatra, Eamon Akil Farhat, James Hirai and Aline Oyamada.
(Updates market reaction in third paragraph.)
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