EY ITEM Club comments on today's labour market figures and MPC minutes
14 August 2013
- Underlying momentum in the labour market suggests unemployment will continue drifting down
- The lack of a unanimous vote in favour of forward guidance reduces its potency and the MPC has signalled the possibility of more QE
On labour market
Nida Ali, economic adviser to the EY ITEM Club, comments on today’s labour market figures:
“This is another encouraging set of figures for the labour market, as employment edged up and the unemployment rate flat-lined. The wider UK economy finally seems to be on a sustained path to recovery.
“There appears to be underlying momentum in the labour market, given the increase in full time workers and vacancies, as well as a another sharp drop in the claimant count. Unemployment is likely to have peaked and should continue drifting down in the coming months. Nevertheless, we don’t expect unemployment to be back below the MPC’s 7% threshold until late 2015.
“Earnings growth is still very weak but is at least beginning to move in the right direction. The sustained increase in employment should allow workers to bargain for better wages in the future. Plus, with inflation set to fall over the months ahead, the gap between the two should keep narrowing. This will ease the squeeze on household finances with the consumer sector likely to play a major role in the recovery.”
Commenting on the MPC minutes, Nida Ali, economic advisor to the EY ITEM Club added:
“It was interesting that the vote on forward guidance was not unanimous, with Martin Weale deeming the time horizon of 18-24 months for the inflation knock out to be too long.
"Meanwhile, the unanimous vote against further QE for the time being was not surprising. Although some members continue to feel that more QE may be warranted, they are now in wait-and-see mode to gauge whether explicit forward guidance will be able to reduce interest rate expectations on its own.
“In our view, QE had already passed its sell by date and we believe that forward guidance will be beneficial for the UK. The economy is in recovery rather than remission and this guidance gives the Bank the flexibility to reduce the risk of relapse. It will help put a floor under firm’s expectations of output growth, as well as unemployment, and should therefore stimulate corporate spending. It should also help prevent the market derailing the recovery with a premature increase in market interest rates.”