- Unemployment rate falls again
- Job vacancies soar
- Wage increases beat expectations
- But warnings that wage hikes limited to specific sectors
Image © Adobe Stock
The latest UK labour market data suggest the UK is all but likely to avoid a major increase in unemployment following the ending of the government's furlough scheme in September, paving the way for a Bank of England interest rate hike.
According to the ONS the UK continued to create jobs into August while the number of vacancies reached a new record.
The UK created 235K jobs in the three months to August, an acceleration on the previous month's figure of 183K, although it was less than the market was expecting at 243K.
But this was by no means a weak report given the unemployment rate fell back to 4.5% from 4.6%, suggesting 'tightness' continued to build into the market ahead of the ending of the government's furlough scheme in September.
Further signs of 'tightness' - a key metric in Bank of England decision making - was found in the increase in wages as the Average Earnings Index (+Bonus) increased by 7.2% in August, more than the 7.0% expected, albeit down on the previous month's 8.3%.
"In several sectors, near-frenzied competition for staff is forcing employers to raise wages sharply. The average salary for driving jobs advertised on Indeed has soared by 8.5% since the start of 2021, outpacing construction - at 8% - as the sector with the fastest growing wages," says Jack Kennedy, UK economist at Indeed.
The labour market will arguably be the determining factor in whether or not the Bank of England raises interest rates in late-2021 or early-2022.
"The latest UK jobs numbers won't sow any seeds of doubt among investors, who are pricing a strong likelihood of a rate hike this year," says James Smith, Developed Markets Economist at ING Bank.
The Bank is concerned that UK inflation risks moving above the 2.0% level on a sustained, multi-month timeframe, thereby ensuring the need for interest rates to rise.
But such sustained inflationary levels can only be achieved if the unemployment rate continues to fall amidst increasing employment and - crucially - rising wages.
The trend of an improving labour market looks set to extend given the ONS' finding that yhe number of job vacancies in July to September 2021 was a record high of 1,102,000, an increase of 318,000 from its pre-pandemic (January to March 2020) level.
This was the second consecutive month that the three-month average has risen over one million.
"The number of vacancies across the UK during the final three months of the furlough scheme surged to 1.1 million, smashing the record set only a month before," says Kennedy.
"Even though the Government support for employers was only withdrawn completely at the end of September, its gradual tapering over preceding months did not produce the surge in unemployment that many had feared," he added.
Indeed finds that wage inflation pressures remain specific to some sectors, warning that across the broader market advertised wages are up just 1.4%.
"Turning the UK into the higher-wage economy the Prime Minister called for in his Conservative Party Conference speech will require much more, including sustained improvements in productivity growth,” says Kennedy.
ING Bank are cautious on the outlook and say the Bank of England might be too optimistic in assuming that the unemployment rate won’t increase over coming weeks.
"Around 2% of employees were likely still furloughed for all of their usual hours when the scheme recently ended, and three-fifths of staff on the scheme were in small businesses. We suspect this partially reflects a lack of confidence among smaller firms to return to their pre-Covid workforce size," says Smith.
They also note that those furloughed just before the scheme ended appeared to be much more evenly dispersed across sectors than earlier in the pandemic.
"It appears some industries have managed to return to pre-virus levels of economic activity with smaller workforces," says Smith.
ING expect the first rate rise for May 2022, but accept they may soon need to bring that forward depending on what Bank of England speakers say about market pricing over the coming few days.