It was positive to see the employment data released this week. Perhaps of most importance was the unemployment rate, observed in the three-months to November at 4.1% versus an expected 4.2%. Despite only realising a whisker better than forecasted, the data paints a picture of the UK labour market, at least from an unemployment perspective, almost identical to that of the pre-pandemic economy. But if we look beyond just unemployment, the UK economy, even just the labour market, is markedly different to what is was in early 2020.
Unemployment may be just 0.1% from its pre-pandemic levels but the employment rate is 1.1% shy of its Feb 2020 levels. Hmmmm… No, not a typo, it’s all to do with labour force participation and the changing composition of the UK workforce. Particularly within older tranches of the population, the pandemic has seen (perhaps encouraged?) a high rate of redundancies (voluntary and forced) as well as retirements. Assuming that we don’t see a reversal of this trend, this should continue to keep unemployment figures suppressed and the labour market tight.
This tightness of supply and demand within the labour market gives credence to the Bank of England’s new found hawkish tilt with the broader economy now seen as capable of absorbing higher interest rates. Higher yields in the UK will continue to support GBP even, as GBP crosses have proved recently, in the face of political uncertainty. However, with wage inflation in the UK continuing to keep pace with already rapid price level inflation, the rising cost of labour could present a challenge to many businesses. As we emerge from the pandemic, consumer demand and investment will have to be robust to keep up with the rising cost of capital and labour for businesses to flourish.
As we saw this week, the trading profits of many US banks (most notably Goldman Sachs) have been hurt by the rising cost of retaining top talent. Inflation feeds inflation, feeds inflation, feeds inflation… With the next Bank of England decision only a couple of weeks away, the rhetoric of the Bank will be crucial to identifying the growth prospects of the UK economy this year and next.
Discussion and Analysis by Charles Porter
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