Firmer labour market data is more noise than signal – EY ITEM Club comments

• Though the latest Labour Force Survey (LFS) data reported a surprise increase in UK employment, the EY ITEM Club think this is more noise than signal. Other measures suggest labour demand is continuing to weaken and the economic downturn is likely to deepen in the near-term. Therefore, the EY ITEM Club expects employment to fall back and unemployment to tick up further, even if labour supply remains subdued.
• Wage growth continued to edge up in the three months to October, but the EY ITEM Club does not think this will be enough to stop the Monetary Policy Committee (MPC) slowing the pace of rate increases at Thursday's meeting. Rather, the EY ITEM Club thinks elevated service sector settlements and the resulting stickiness of inflation are more likely to make it harder for the MPC to cut interest rates next year. 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “Recent labour market releases have seen continued falls in unemployment despite obvious signs that labour demand was weakening, with rising inactivity squaring the circle. The LFS data for August to October reported a surprise turnaround in employment, which increased modestly compared with the previous three-month period. However, the unemployment rate also nudged up to 3.7%, from 3.6% in the May to July period. The single-month LFS data suggests the apparent pickup in employment is just noise in what can be a very volatile series. Indeed, elsewhere in the release there was evidence that demand for labour is continuing to weaken, most notably with unfilled vacancies falling again from September to November. The EY ITEM Club expects employment to regress, with unemployment set to continue rising, even if labour supply remains weak.

“Growth in headline (the three-month average of the annual rate) average weekly earnings continued to edge up in October, reaching 6.1%, although this was still well below inflation. In the minutes of recent meetings, the MPC has voiced concerns about the strength of services inflation, and with wage growth a key component of services prices, a further pickup in services wage growth to 6.2% may concern those of a more hawkish persuasion. However, the EY ITEM Club does not think this will prevent the MPC from slowing the pace of rate increases on Thursday, with a 50bps increase likely. Rather, the prospect of high services sector pay growth contributing to sticky inflation is more likely to make it harder for the MPC to cut interest rates next year.”