Britain’s unemployment rate unexpectedly fell after businesses stepped up hiring, a sign of underlying strength in the economy and complicating the Bank of England’s move to lower interest rates.
The Office for National Statistics said on Tuesday that the unemployment rate fell by 0.2 percentage points to 4.2% in the three months to June. Economists had expected a modest increase. Employment surged by 97,000, well above forecasters’ expectations for a 3,000-person gain. The slowdown in wage growth was in line with expectations.
While economists noted questions about the reliability of the ONS Labor Force Survey, which underpins the unemployment data, investors interpreted the data as a sign of underlying inflation as a sign of strength in the economy. The overall unemployment rate in the second quarter was lower than the 4.4% forecast by the Bank of England.
Sterling rose 0.3% on Tuesday, rising above $1.28, making Britain the best-performing currency in the Group of 10 nations. This contrasts with the situation in the United States, where weak employment data has roiled markets in recent weeks. Data due later this week is likely to show strong growth in the UK economy and inflation rising for the first time this year.
Andrzej Szczepaniak, senior economist at Nomura Securities, said: “Investors may have questions about the weakening US labor market and sluggish euro zone GDP growth, but the UK does not appear to be facing any problems.” “UK labor market data remains strong, activity data remains strong , supporting our internal view of the divergence between the Fed and the Bank of England.”
Employment rose across the board, with only the number of employed 16- to 17-year-olds falling sharply this quarter. The number of employees on company payrolls rose by more than 24,000 in July, more than double economists’ forecasts, according to real-time data from administrative data.
Other data showed that regular wage growth fell to 5.4% from 5.8% in the previous period. This is the weakest year-over-year wage growth since the summer of 2022. This is mainly due to a one-off bonus paid to NHS staff last year.
Bank of England officials have been watching wage data for signs of inflation, but are also concerned about the ability of the broader jobs market to push up wages and prices.
What does Bloomberg Economics say…
“Private sector regular wages growth cooled again in June and is expected to fall below 5% in incoming data. The data supports more easing from the Bank of England this year, although an unexpected fall in the unemployment rate bodes well for the economy if the economy continues to accelerate. recovery, the risk that the job market may start to tighten again may keep the Bank of England cautious – we think it will cut interest rates further in November.
—Dan Hansen, senior economist. Click “React”.
A series of British economic data released this week will set the tone for the Bank of England’s next policy decision on September 19. At the same time they assess the intensity of domestic price pressures in the economy.
“The Bank of England’s concern will be the signal the data sends about the underlying strength of the labor market,” said Stuart Cole, chief macroeconomist at Equiti Capital. “Tomorrow’s consumer price index data is also expected to show that inflationary pressures are starting to rise again, once “Everything is priced in and the market’s conclusion is likely that further rate cuts this year are not a done deal.”
Inflation data on Wednesday could show price pressures rising for the first time this year, and the strong data could weaken the case for further easing from the Bank of England.
Some officials expressed lingering concerns about strong wage growth. Catherine Mann, one of four hawkish rate-setters who opposed the change earlier this month, warned on Monday that the “increasing momentum” in wages and prices would “take a long time to dissipate” .
“If you look closely, the decline is driven by public sector wages rather than private wages,” said Mizuho strategist Evelyne Gomez-Liechti. Private wages are probably the BoE’s biggest concern. Mann had already warned yesterday that the ‘rises’ in wages and prices would take ‘a long time to dissipate’. It sounds like today’s data is unlikely to change her vote.
Job openings data showed signs of an easing labor market, with job openings falling slightly to 884,000. This is the lowest level since mid-2021. The report also shows:
- The Bank of England is closely watching regular private sector wage growth for signs of domestic stress, which fell to 5.2% from 5.6%. This is the lowest level in more than two years.
- The employment rate edged up to 74.5%, the highest level since the first quarter.
- About 100,000 working days were lost due to strike action in the healthcare industry in June. That’s up from 51,000 in May.
- Wage growth is outpacing inflation, and household finances continue to be supported. Real wage growth remained at 3.2%, the highest level since 2021.
Bank of England officials have also been cautious in their interpretation of employment data after the Office for National Statistics suspended its labor force survey last year. It is overhauling the survey, but the introduction of new “transformed” data has been delayed until next year.
The central bank expects the unemployment rate to reach 4.8% in the next few years, still lower than the peak during the epidemic and financial crisis.
Ruth Gregory, deputy chief UK economist at Capital Economics, said: “Despite the fall in unemployment, we doubt today’s data will have much impact on the Bank of England. “It’s hard to know how much weight we should give to these numbers” because of concerns about the accuracy of the data, she said.
