More signs that demand for workers is easing – EY ITEM Club comments

• A further fall in job vacancies and rise in redundancies suggests that demand for workers declined in late 2022. However, the recent unprecedented tightness of the jobs market should limit how far unemployment rises in the recession that the economy probably faces in the first half of this year.  

• Meanwhile, inactivity dropped back which offered another sign that the labour market is loosening. Nevertheless cash pay continued to rise strongly. But a combination of a weak economy and falling inflation should supress pay growth, encouraging the Monetary Policy Committee (MPC) to dial back the pace of rate increases.      

• EY ITEM Club Winter Forecast published on 23 January. 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “The latest labour market numbers added to the evidence that the extremely tight jobs market is becoming less so. While job vacancies were still high at 1.16m in Q4 2022, they continued the decline which began last summer. And redundancies rose to the highest in over a year, albeit to a level still low by past standards. The Labour Force Survey unemployment rate stood at 3.7% in the three months to November, up 0.2ppts from the previous three months, with a fall in inactivity more than offsetting a small gain in employment.  

“Evidence of softer demand for workers has not yet fed through to the price of labour. Annual growth in average total and regular weekly wages was 6.4% year-on-year in the three months to November, the latter a record high outside the pandemic period. But average pay continued to fall heavily in real terms, and the EY ITEM Club thinks a weaker economy and declining inflation should eventually see pay rises fall back.  

“On balance, the latest numbers won’t dissuade the Monetary Policy Committee from continuing to raise interest rates. But more evidence of a loosening jobs market might encourage a dialling back of the pace of tightening. So should the prospect of rising unemployment, as the headwinds facing the economy make their mark. Granted, inactivity is still above pre-pandemic levels, impairing the economy's supply capacity. But the recent decline in inactivity might continue if cost-of-living pressures compel some inactive people to enter, or re-enter, the workforce. As to how far unemployment might rise, with vacancies still high by historical standards and surveys continuing to point to a shortage of workers in some sectors, employers may choose to hold on to labour during the downturn. As a result, the EY ITEM Club think the jobless rate should peak below 5%, a modest deterioration by the standards of past downturns.”