Following the disappointing inflation data yesterday, today saw the release of latest labour market statistics which showed the ILO measure of unemployment rising to 7.9% in the 3 months to June – just shy of the 2.5 million mark. Within the details, net employment actually increased by 25,000 in the second quarter, but it was not enough to offset the rise in the working population, which meant that the number classified as unemployed increased by 38,000.
With the rioting in England still in focus, there was some good news from the labour statistics. Although youth unemployment remains close to historic highs, unemployment for those aged 16-17 fell from 37.5% in the first three months of the year to 36.7% in the three months to June.
Meanwhile, the claimant count, the alternative measure of unemployment, also increased in the latest set of numbers. The estimate for July showed an increase of 37,100 new claimants, taking the rate as a share of the 18+ population to 4.9% - a new recent high.
There was some good news in the labour market release. Average weekly pay including bonuses increased at its fastest pace since April 2010, rising by 2.6% compared to a year earlier (3 month average). In addition, most of the increase was driven by the private sector rather than the public sector, reversing some of the imbalances seen in the past year. In particular, pay in both the construction sector and the wholesaling, retailing, hotels and restaurants sectors saw positive increases in pay, having up until now been reporting significant falls. It is however worth bearing in mind that with CPI inflation running at 4.4% as reported yesterday, almost every sector in the economy is seeing pay fall in real terms.
Overall, the loss in positive momentum in the labour markets is disappointing, but at the same time not unexpected. A number of temporary factors badly hit activity in the second quarter of this year which the Office for National Statistics estimates may have reduced GDP growth from 0.7% to just 0.2%. These factors would have also dampened demand for hiring over the same period. The key question for us is whether the recent bout of turmoil in financial markets will knock the confidence of businesses causing them to delay investment decisions. In our view, there is a good chance of this happening and so we have reduced our GDP forecast for the second half of this year. This should also soften the employment recovery, at least temporarily, until business leaders are clearer over the prospects of another recession – which we think is unlikely.
In the midst of market uncertainty and disappointing macroeconomic data, the Bank of England revealed that all of the members of its Monetary Policy Committee (MPC) voted to keep interest rates on hold in its August meeting. This represents a significant change in the recent voting pattern, showing that the two remaining hawks on the committee (Martin Weale and Spencer Dale) have retreated from their calls of raising interest rates. Given the enormous uncertainty around the future the Eurozone - of the UK’s biggest trading partner – and the weakness in the US economy, it is now impossible to argue that now it the right time to raise interest rates. Though the committee has always stressed that the impact of higher rates comes with a lag, there is an immediate psychological effect which would damage consumer and business confidence.
In our view, the likelihood of a rise in interest rates before 2013 is now very slim. The Bank of England appears willing to tolerate higher inflation in order to support growth, and believes that the weakness of the global economy will bring inflation down over the medium term. Indeed, there was some discussion of restarting the Bank’s asset purchase programme, also known as Quantitative Easing. At this stage, only Adam Posen is voting in favour of such action amongst the MPC. However, that maybe because of the high rate of inflation the UK is experiencing. The prospects of more Quantitative Easing could become more tangible in 2012 once the impact of the rise in VAT comes out of the inflation calculation, bringing inflation back down. For now, the Bank of England remains in ‘wait and see’ mode.
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