UK Jobs Market Slowing Amid Worker Shortages, BoE to Press Ahead With Tightening
- UK jobs growth slowed significantly in the three months to July.
- That was mostly due to worker shortages, with the jump in the economic inactivity rate.
- Elevated wage growth as businesses compete for workers keeps pressure on the BoE to tighten.
UK Jobs Market Slows Amid Worker Shortages
Despite the UK unemployment rate falling to its lowest level since the 1970s in the three months to July, there are growing signs that the UK jobs market is slowing, though analysts think that persistent worker shortages and still elevated wage growth will maintain pressure on the BoE to hike interest rates rapidly in the coming quarters.
The UK jobless rate unexpectedly fell to 3.6% from 3.8% in the prior three months to June period, with analysts having expected it to remain unchanged. The drop was primarily driven by falling labor force participation, however, with job growth slowing significantly.
According to the UK Office for National Statistics (ONS) report, only 40,000 new jobs were created in the three months to July, well below the expected 128,000 gain. The so-called economic inactivity rate (i.e. working-age individuals not participating in the labor market) rose to 21.7% from 21.3% in the prior period.
A jump in the number of workers classified as long-term sick, which has risen by 150,000 in the last two months, has contributed to a shortage of workers that has driven the slowing pace of job gains/rising inactivity rate. ING notes that the number of workers sidelined from the jobs market due to sickness is up 400,000 versus pre-pandemic levels.
Analysts at the bank state that the latest jobs figures back up the takeaway from recent business surveys that suggest firms are still struggling to find workers. “Both the BoE’s Agent’s survey and the ONS’ bi-weekly business survey have shown no improvement in the number of firms saying they are struggling to source workers” as of late, they say.
While UK job vacancies did drop by 34,000 in the three months to August, according to the latest ONS figures, it remains close to record highs at 1.266 million, indicating demand for workers is not the limiting factor in the slowing UK jobs market.
BoE to Press Ahead With Further Tightening
Though the shortage of workers signifies that the UK economy is operating below its potential, it maintains the pressure on Bank of England to continue with aggressive rate hikes. Competition for scarce workers meant that Average Earnings excluding bonuses rose more than expected in July to 5.2% from 4.7% a month earlier, well above the BoE’s 2.0% inflation target and potentially adding to fears that the UK economy has entered a so-called “wage-price” spiral.
“Persistent worker supply constraints coupled with so far only modest signs of reduced hiring demand will provide further ammunition for Bank of England hawks to push ahead with further tightening”, said analysts at ING. According to a recently released Reuters poll, the BoE is expected to implement another 50 bps rate hike next week, taking its benchmark rate to 2.25%.
Some analysts are warning it may have to go as high as 4.0% in 2023 in light of UK PM Liz Truss’ recently announced fiscal stimulus package designed to protect consumers from a massive energy price hike this coming winter, as well as shield businesses. While the plan has contributed to a fall in how much headline inflation is expected to rise in the coming quarters, some think it will boost core inflation in the UK.