July’s figures showed that the labour market has remained remarkably resilient despite the underlying weakness of economic growth, but some small cracks are starting to appear.
Losing some shine
- July’s figures showed that the labour market has remained remarkably resilient despite the underlying weakness of economic growth, but some small cracks are starting to appear.
- The most striking aspect of the latest figures was the rise in the headline (three-month average) measure of weekly earnings from an upwardly-revised 3.8% in June to 4.0% in July, its highest since June 2008. (See Chart 1.) Average hourly earnings growth picked up sharply too, from 3.0% in June to 3.5%. Meanwhile, the unemployment rate ticked down again from 3.9% to 3.8%, its joint lowest since 1975.
- However, the headline measure of pay growth excluding bonuses edged down a notch from 3.9% to 3.8%. (See Table 1.) And the recent surge in employment appears to have petered out, with employment rising by only 31,000 in the three months to July, below the consensus forecast of a 53,000 rise (although in line with our own forecast). That dragged annual employment growth down from 1.3% in June to 1.1% in July.
- Employment growth has slowed to this pace before in the past few months. But we are not convinced that it will rebound again this time. The survey evidence is consistent with a further softening in both employment and wage growth going forward. Indeed, the employment sub-index of the IHS/Markit composite PMI survey is consistent with a slowdown in employment growth to about 0.7% in early 2020. The number of job vacancies – which dropped for the seventh month in a row and at the fastest pace in over eight years – points to a sharper easing.
- But the labour market remains in fine fettle. Even if employment growth does slow, it may remain only a little below its long-run average of 1.0% and the unemployment rate will probably stay close to its joint 45-year low.
- So the labour market still looks set to provide solid support to the consumer sector over the next few years. And against the background of stagnant productivity but rising wage growth, the pick-up in inflationary pressures will probably prevent the Bank of England from becoming too dovish despite the weakening global backdrop.
Chart 1: Wages (Headline, 3m Average, %y/y)
Sources: Refinitiv, Capital Economics
Table 1: Labour Market Data
Average Weekly Earnings
(3m av. %y/y)
Ruth Gregory, Senior UK Economist, +44 20 7811 3913, email@example.com