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
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Morning Brief – UK Labour market
Humphrey Percy
Wed 29 Nov 2023
UK Labour market The Bank of England yesterday broke cover to drive the message home that due to the UK’s labour market remaining tight, it was premature to start talking interest rate cuts and it was not just Governor Bailey who was calling for higher for longer interest rates but also his MEPC colleague Jonathan […]
Morning Brief – British Pound
Humphrey Percy
Fri 24 Nov 2023
British Pound Two days after the Autumn Budget Statement, the Pound is hanging in there and is looking firm. Why? Despite some attempts to talk it up on the grounds of the economy not in fact contracting, but merely marking time, the real reason is that while not being shouted from the rooftops, but definitely […]
Morning Brief – UK: We Will Cut Taxes
Humphrey Percy
Wed 22 Nov 2023
UK: We Will Cut Taxes This morning will demonstrate that it is worth listening carefully when politicians make promises. In this case it is the word “will”, because with the economic tank almost completely dry, while he is a recent convert to the idea of cutting taxes, Chancellor Hunt has limited scope to do anything […]
