Is UK Employment Already Falling?

Summary

• UK March (ONS) and April (HMRC) data increased our belief that the labour market will loosen faster than the BoE assumes. Participation rate is near post-GFC averages, and full-time employment growth continues to decline.
• The big surprise was the HMRC’s April data, which showed its largest MoM decline in payrolled employees since the series began in 2014 (ex-COVID crash).
• Wage growth, particularly for regular private sector pay, remains high, and its momentum suggests an overshoot vs BoE estimates. However, if ONS employment figures decline, the focus on wage growth would lessen.
• We will get next month’s (April ONS, May HMRC) labour market data before the next BoE meeting. Employment and private wage growth will be key. The unemployment rate could see MoM swings on participation rate change, but if employment growth slips further (or turns negative), this would dominate the tone.

Private Sector Pay Growth Remains Strong

Private regular pay growth (the BoE’s current focus) dropped marginally to +7.2% YoY (from +7.3%). This is still too high. Meanwhile, 3M-on-3M momentum (which the BoE follows closely) moderated its recent decline and remains elevated, so it was not all dovish news. Q1 private pay growth remains above BoE forecasts. Base-effects should fall out through Q2. But if recent wage growth momentum persists, it will end the year significantly above BoE forecasts – nearer 7% than 6% YoY (Chart 1).

Vacancy: Unemployment Ratio and Inactivity Rate Falling

The BoE tracks the ratio of vacancies to unemployed closely as an indicator of labour market tightness. Here, the results remained resoundingly dovish. Not only did the ratio drop another 0.3ppt to 84% in March, but the fall in vacancies was such that the ratio’s decline will continue strongly even if unemployment stabilizes in April (HMRC data suggests it will rise). Meanwhile, the trajectory for labour market participation provides further comfort to the BoE. In line with our long-term expectation, consumer pressures seem to be forcing participation sharply up (Chart 2). It is now near the post-GFC/pre-COVID average. As such, our conviction on further rises is weaker, and the rate may stabilize ahead.

Unemployment Above BoE Forecast

Unemployment surprised to the upside at 3.9% (prev: 3.8%) on the rise in participation rate, despite a relatively strong rise in March ONS employment (+182k 3M/3M).

Meanwhile, the timelier claimant count (the proportion of working age population claiming job-seeker’s allowance) ticked up to 4%, its highest rate in almost a year. Unemployment remains near historic lows. With participation rate now at more normal levels, growth in employment will probably become the more important factor. There, the evidence suggests there could be dovishness ahead.

Is Employment Already in Decline?

The YoY rise in ONS employment data growth (+363k) remains high, relatively consistent with DMP survey data that indicates a rise in employment growth expectations.

By contrast, the 12 month payrolled employee change by HMRC dipped significantly in April (-136k). That is the biggest move on record outside the 2020 COVID decline. The measure is frequently revised, but the scale of this move is too substantial to overlook. Ahead, if this feeds into a decline in ONS employee numbers, unemployment could continue to rise even if participation rate stabilizes.

Employment Composition Shifts Towards Part-Time

Breaking down the ONS numbers, we can see that the composition of employment continues to shift more towards part-time (dashed lines in Chart 5) and self-employment.

This increases our belief that the labour market is loosening even beyond the ONS’s headline employment growth numbers. If next month’s release confirms the decline in payrolled employees suggested by the HMRC data, the BoE will need to take note. The shift in employment composition could also suppress weekly pay growth figures ahead.

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)