UK reaction: Unemployment rises but the focus remains firmly on pay growth

The UK’s jobs market appears to be cooling with the Pay As You Earn (PAYE) measure of employee numbers falling by 67K in March. This puts three-month-on-three-month growth at just 0.1%, the slowest pace since February 2021 when the UK was still in lockdown. Meanwhile, Labour Force Survey data showed that employment fell by 156K in the three months to February, compared to the previous three months, pushing up the unemployment rate to 4.2%, from 3.9% in January. That is still below the Bank of England Monetary Policy Committee’s (MPC) expectations for the first quarter (Q1), at 4.4%, but today’s data is a step in the right direction for the MPC, particularly as other employment measures are also increasing gradually. Vacancies, for instance, fell for the 21st consecutive period in the three months to January, and are now 383K below their peak in the three months to June 2022. Survey measures are also consistent with a further small rise in the unemployment rate in the months ahead.

The focus, however, was on wage growth which came in above expectations, despite edging back. Indeed, the headline rate of average weekly earnings excluding bonuses dropped to 6.0%, from 6.1%, but had been expected to slow to 5.8%. And the three-month-on-three-month annualised growth rate picked up to 4.8%, from 3.5% in January.

Changes in pay growth will be key for the MPC over the next couple of months, as it monitors the impact of the near 10% National Living Wage hike this spring. We doubt the upward pressure from this will be enough to stop the headline growth rate from ticking down over the coming months, since it affects just 5% of the labour force. The MPC will have this information by its June meeting, so a cut then still looks most likely to us. The slowdown in pay growth should then gather momentum in the second half of the year as unemployment continues to rise. Indeed, a gradual pick-up in the workforce, due to strong immigration, should mean the unemployment rate continues to rise, reaching around 4.4% by year end. The market reaction was fairly muted. Sterling is up 0.05% against the dollar at $1.2436.