The UK’s red hot labour market appears to be cooling with growing signs of the slowdown that the Bank of England believes is necessary to reduce inflation.
What started with a dip in vacancies in the spring of last year has now spread to weaker hiring intentions, an easing in recruitment difficulties, some improvement in labour market participation and slower private sector pay growth.
Economists are predicting the UK labour market, perhaps the most important indicator of persistent inflationary pressure, is at a turning point. But with the data still tentative, they say the evidence of a slowdown may not be strong enough to persuade the central bank to pause its interest rate rises at the current level of 4.25 per cent.
BoE officials raised interest rates in March on the back of what they said was continued “strength” in the labour market and are not yet declaring victory in the battle to reduce inflation. But they have noticed the changing landscape.
Huw Pill, the bank’s chief economist, said earlier this month that “wage developments . . . appear to be easing” in a speech that nonetheless hinted at further rate rises to come.
The most recent measures of average earnings growth — the latest month or the past three months rather than a full year — suggests that wage pressures are slipping away.
Annualised regular wage growth over the month to January was only 1.2 per cent, while over the most recent quarter it was 5.5 per cent. Both are much lower than the headline 7 per cent annual figure.
Tony Wilson, director of research consultancy the Institute for Employment Studies, said that this data, alongside new stability in advertised salaries in job adverts, suggested that “there are definitely signs that things are slowing down”.
“It does look like salaries aren’t rising any longer, which is probably good for people that don’t want interest rates to go up,” he said.
It is not only wage data that points to a cooler labour market. Bruna Skarica, UK economist at Morgan Stanley, said that although the level of vacancies was still high in historical terms, “redundancy intentions have been picking up . . . [and] with below-potential growth, we continue to expect broadly flat employment growth over the next two years”.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that one of the most telling pieces of new data came from the BoE’s own survey of companies ability to recruit new staff.
“Firms now report that it is less difficult to recruit than on average in the second half of the 2010s,” he said. “Immigration has picked up, and existing workers are willing to supply more hours, so the very low unemployment rate has been less of an issue. The data overall are much more reassuring than a couple of months ago.”
One of the key issues that BoE officials will need to ponder ahead of their next interest rate meeting in early May is whether the labour market data now shows the true state of play. The figures had been heavily distorted both by the coronavirus furlough scheme, which lasted until the end of September 2021, and a resurgence in people changing jobs after the effects of the pandemic waned last year.
Wilson said that we are only now likely to be seeing more accurate labour market data and it is pointing to less tightness, which should be reassuring for inflation. Even some indicators such as the growth in people aged over 50 describing themselves as “retired” has begun to disappear, he said.
“We’ve now got through the significant churn we saw in 2022 and are doing a bit better on labour supply,” Wilson said, although he cautioned that rates of people classed as long-term sick were still elevated after Covid-19.
Some economists even questioned whether it was wise to continue to look at series of data covering vacancies over a long period because the costs of keeping jobs open, even if employers had little expectation of filling them, had fallen so fast in an age of digital advertising.
Simon French, chief UK economist at Panmure Gordon, said: “The cost of an advert has fallen so far since the good old days of dead tree adverts that [this] perhaps incentivises companies to ‘hold’ adverts longer than they actually exist.”
For him, the combination of published data and conversations with companies led him to think “we are now seeing that excess demand [in the labour market] ease”.
Not all of the labour market data will reassure the BoE that wages are no longer a problem, however. Wage settlement data from consultancy XpertHR shows that agreements remain at a historic high of 6 per cent and are not yet showing signs of coming down.
Allan Monks, UK economist at JPMorgan, said the BoE would need to see significant further cooling of wage pressures before it could be confident it had inflation under control.
“Without a drop in wage growth back to around 3 per cent or so, the BoE is likely to struggle to meet its inflation objective,” he said.
