Cool, Britannia! More rate rises in question as heat comes off jobs market

The UK labour market appears to be starting to cool off. What does that really mean for the economy – and the Bank of England?

A sharp reversal

The 136,000 drop in the pay-as-you-earn (PAYE) employees in April seemed to come out of nowhere. City forecasters were expecting an increase from 0 to 65,000. Instead, we got the biggest monthly slump since May 2020. This is still a provisional figure that could be subject to a significant revision. But it’s still, clearly, a big drop.

PAYE employee payrolls, net monthly change

Sources: ONS, NatWest Markets

On the face of it, another source of official data – the Labour Force Survey – paints a very different picture, with a 182,000 increase in the total number of people employed for the first three months of 2023. And yet this is due to rising numbers of part-time and self-employed workers, with the number of full-time employees down. 

Both employment datasets are consistent with a deterioration in the labour market. 

Employment and economic growth go their separate ways: is this an end to the labour market’s impressive resilience?

Up until recently, employment had been surprisingly resilient in the face of the shock of the pandemic and subsequent fall in economic growth. That’s because post-pandemic, post-Brexit cyclical and structural forces have clearly altered the previous relationship between economic growth and employment. Employers seemingly resorted to labour hoarding in an environment in which workers have become much harder to attract and retain. Nevertheless, it was surely only a matter of time before the employment picture weakened against a backdrop of a spluttering economy. 

There are other signs that labour market tightness is easing. For example, the level of inactivity – the number of people not in a job and not registered as unemployed – has been trending lower for eight months in a row, such that it is now around 280,000 lower than its high point. And there’s also evidence of a slowdown in demand for labour – the number of vacancies has fallen for 11 consecutive months, with the result that the vacancies-to-unemployment ratio has sunk to its lowest level since mid-2021.

UK labour participation inactivity, cumulative change since January 2020

Sources: ONS, NatWest Markets

Gradually, then suddenly: the latest data should encourage the Bank of England to tread carefully around tightening

We’re not too worried about April’s 136,000 fall in employment in itself, as it’s a one-off figure that’s likely to be revised. But there’s no denying that there’s clear evidence that employment trends are moderating, and the April figure could be a signal of an abrupt deterioration. 

While we’re still forecasting a moderate rise in UK unemployment from 3.9% in March to 4.4% by the end of the year, and 5.0% by the end of 2024, we believe the latest data will urge caution when considering further interest rate rises. The Bank of England has already raised rates significantly and quickly. Given the lagged effect of monetary policy on economic growth and employment, the latest data could encourage it to tread carefully if it’s thinking about hiking rates further. 

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