The labour market has shrugged off the 0.2% q/q fall in GDP in Q2, providing support to our view that the economy will recover in Q3. Indeed, employment rose by 115,000 on the quarter (consensus +60,000), the largest increase since February.
Labour market shrugs off economic contraction
- The labour market has shrugged off the 0.2% q/q fall in GDP in Q2, providing support to our view that the economy will recover in Q3. Indeed, employment rose by 115,000 on the quarter (consensus +60,000), the largest increase since February.
- The increase in employment was driven by an 118,000 surge in part-time employment, but that doesn’t undermine it. Indeed, the figures suggest that those workers prefer part-time to full-time work. In any case, it is encouraging that firms have continued to add to their workforce, suggesting they expect activity to pick up again following the Brexit hangover in Q2.
- Wage growth also strengthened, to its fastest pace for 11 years. Headline wage growth (including bonuses) rose from 3.5% to 3.7% as expected as a temporary dip in March dropped out of the three-month average. (See Table 1.) And the excluding bonuses measure the MPC watches most closely rose from 3.6% to 3.9%.
- That should support consumer spending. But seeing as output per hour fell for a fourth consecutive quarter, leaving it down 0.6% y/y, higher wage growth should push up unit labour costs and inflation too. As a result, if a no-deal Brexit is avoided, we still think interest rates could rise next year.
- The only blemish on an otherwise strong set of figures was a rise in the unemployment rate from 3.8% to 3.9% (consensus 3.8%). But that was due to a rise back up in the participation rate to the 28-year high it reached in January.
- The pace of hiring in June is unlikely to be sustained. Vacancies fell for a sixth consecutive month in July, and the REC Report on Jobs is consistent with a slowdown in employment growth. (See Chart 1.) That said, we suspect a reversal of the recent rise in participation will take up the slack rather than much higher unemployment. That should see the current strong rate of pay growth sustained. Against that backdrop an increase in interest rates next year can’t be ruled out. On the other hand, a hit to demand from a no-deal Brexit would cause the labour market to soften, justifying interest rate cuts.
Chart 1: REC Demand for Staff Index & Employment
Sources: Refinitiv, Capital Economics
Table 1: Labour Market Data
Average Weekly Earnings
(3m av. %y/y)
Andrew Wishart, UK Economist, +44 20 7808 4062, firstname.lastname@example.org