The slowdown in the UK labor market raises hopes that inflationary pressures are easing

The UK’s scorching labor market appears to be cooling with growing signs of a slowdown that the Bank of England believes is needed to bring inflation down.

What started with a drop in vacancies in the spring of last year has now spread to weaker hiring intentions, an easing of recruitment difficulties, some improvement in labor market participation and slower wage growth in the private sector.

Economists predict that the UK labor market, perhaps the most important indicator of lingering 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 suspend interest rate hikes at the current level of 4.25%.

BoE officials raised interest rates in March on what they called continued “strength” in the labor market and are yet to declare victory in the battle to reduce inflation. But they noticed the changing landscape.

Huw Pill, the bank’s chief economist, said earlier this month that “wage developments. . . seem to be easing” in a speech that nevertheless hinted at further rate hikes to come.

The most recent measures of average wage growth – the last month or three months rather than a full year – suggest that wage pressures are fading.

Annualized growth in regular wages in the month to January was just 1.2%, while in the last quarter it was 5.5%. Both are well below the overall annual figure of 7 percent.

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Tony Wilson, director of the research consultancy at the Institute for Employment Studies, said the data, along with the new stability in wages advertised in job advertisements, suggested that “there are certainly signs that things are slowing down.”

“It looks like wages aren’t going up anymore, which is probably good for people who don’t want interest rates going up,” he said.

It’s not just the wage data that points to a colder labor market. Bruna Skarica, UK economist at Morgan Stanley, said that while the level of vacancies was still high in historical terms, “layoff intentions have increased. . .[and]with below-potential growth, we continue to expect broadly stable job growth over the next two years.”

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Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said one of the most telling new data came from the BoE’s own survey of companies’ ability to recruit new employees.

“Companies are now reporting that it is less difficult to recruit than on average in the second half of the 2010s,” he said. “Immigration has resumed and existing workers are ready to put in more hours, so the very low unemployment rate has been less of an issue. Overall, the data is much more reassuring than a few months ago.

One of the main questions BoE officials will need to ponder ahead of their next interest rate meeting in early May is whether labor market data is now showing the true picture. The figures had been heavily skewed both by the coronavirus furlough scheme, which lasted until the end of September 2021, and by a resurgence in the number of people changing jobs after the effects of the pandemic faded l ‘last year.

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Wilson said we’re only now likely to see more accurate labor market data and that indicates less tension, which should be reassuring for inflation. Even some indicators such as the growth in the number of people over the age of 50 describing themselves as “retired” have started to disappear, he said.

“We’ve now gone through the heavy turnover that we saw in 2022 and we’re doing a bit better in terms of labor supply,” Wilson said, although he warned that the rates of people classified as long-term sick were still high after Covid-19.

Some economists have even questioned whether it makes sense to keep looking at data series covering job vacancies over a long period of time, because the costs of keeping jobs open, even if employers had little expectation to fill them, had dropped so quickly in the age of digital advertising. .

Simon French, chief UK economist at Panmure Gordon, said: “The cost of an advertisement has come down so much since the good old days of dead tree advertisements that [this] perhaps incentivizes companies to “keep” ads longer than they actually exist.

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For him, the combination of published data and conversations with companies led him to believe “we are now seeing that excess demand [in the labour market] facilitate”.

However, not all labor market data will reassure the BoE that wages are no longer an issue. Wage settlement data from consultancy XpertHR shows that settlements remain at an all-time high of 6% and are not yet showing signs of falling.

Allan Monks, UK economist at JPMorgan, said the BoE would need to see a significant further cooling in wage pressures before it could be confident it had brought inflation under control.

“Without a decline in wage growth to around around 3%, the BoE will likely struggle to meet its inflation target,” he said.

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