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UK labour market remains strong in face of Brexit uncertainty

Levels of employment in Britain increased 179,000 to a record high in the three months to February, official data confirmed on Tuesday, but economists see ongoing headwinds for households and businesses.

The ILO unemployment rate remained at 3.9% in February, the Office for National Statistics said, with an estimated 32.7m people in some form of paid employment, keeping the employment rate at 76.1% of all people between 16 and 64 years of age.

Excluding bonuses, wages grew 3.4% compared to a year earlier, driven higher as firms in several sectors find it harder to attract and retain staff. Weekly earnings excluding the effect of inflation were up 1.5%, ONS said. Total pay including bonuses stayed steady at 3.5%, while normal pay growth for January was revised up to 3.5%.

By another measure that is watched by members of the Bank of England’s monetary policy committee, wage growth excluding-bonuses on a three-month annualised basis fell below 2% for the first time in almost two years.

Employment numbers, the unemployment rate and wage growth were all pretty much as economists expected.

More timely data from March revealed that the number of unemployment claimants had risen by a larger than expected 28,200, with the claimant count rising to 3.0% from 2.9% in February.

ROBUST JOB HEADLINES…

ONS deputy head of labour market statistics Matt Hughes said: “The jobs market remains robust, with the number of people in work continuing to grow. The increase over the past year is all coming from full-timers, both employees and the self-employed.”

While employment growth was solid, economist Thomas Pugh at Capital Economics, suspect that this “could mark the peak of employment growth as the Brexit uncertainty reached its crescendo”, for now, seeing the surveys turning down sharply in March.

At the same time, annual regular pay growth in the three months to February ticked down to 3.4% from 3.5%, but total pay (including bonuses) stayed steady at 3.5%, and the unemployment rate remained at 3.9%, the lowest since 1975.

He noted that the annual rate of employment growth slipped to 1.4% from 1.5%, suggesting that with employment growing more slowly than the 2.0% output growth in February, that productivity growth should have picked up. “This could ease some of the recent upward pressure on unit labour costs and give the MPC more confidence to hold off raising rates until Brexit has been resolved,” he said. “Indeed, we do not expect the Bank to resume raising rates until the second half of next year.”

BUT WAGES NUMBERS DON’T TELL FULL STORY

Although earnings have now been growing ahead of inflation for over a year now, in real terms, Hughes noted that wage levels have not yet returned to their pre-downturn peak.

Wage data is indeed only half the story, with inflation data on Wednesday due to confirm the degree to which pay is rising ahead of costs. Consumer price inflation printed at 1.8% at the last reading.

Ed Monk, an associate director at Fidelity International, said the decade of lost wage growth means “it may be a while before households feel like they’re getting any richer”.

Monk added: “The state of the UK economy now kind of depends whether you’re a half full or half empty sort of person. Looking on the bright side, it’s a comfort that the pressure on households is easing. On the other hand we know that growth is under pressure and a fall in foreign investment since the Brexit is storing up problems for the future.

“The Bank of England appears unlikely to tightening interest rates in this environment. That helps UK stock market investors in two ways – it gives consumers and companies a hand with lower borrowing costs and it makes returns on risk-free assets like cash less attractive.”

With Brexit uncertainty set to persist, even though it is contributing to the skill shortages that are continuing to boost pay growth, economist James Smith at ING agreed that it is unlikely to be followed up with a BoE rate hike later this year.

Looking at the robust wage growth he saw few reasons to expect this trend to fade imminently, although amid all of the uncertainty, he observed that the number of people on the unemployed claimant count has begun to exceed the number of job vacancies, which was “perhaps a sign of some weakness ahead”.

Smith does not expect a substantial rebound in economic growth over the next few months, with business still facing headwinds including staff shortages, slower global growth and Brexit uncertainty.

He was another who felt it a MPC rate rise was “pretty unlikely” this year – “unless some form of deal is approved earlier than most people expect”, with further gradual tightening impossibly to rule out in the medium term if wages growth rises higher.

By Oliver Haill

Source: ShareCast