UK: Labour market still resilient - Natixis

Sylwia Hubar, Research Analyst at Natixis, notes that the recent data showed that the UK’s unemployment rate stayed unchanged at 4.9% in the three months to August while the employment further grew by 106k over the quarter and the pay growth continued at 2.3%.

Key Quotes

“In the period ahead, we expect fewer and fewer signs of resilience in UK’s economy. Investment and hiring will be dragged down by the risk of negligible EU market prospects. The uncertainty and increased business cost savings will also put a downward pressures on pay awards.

In the three months to August, UK’s employment rate was at 74.5%, the highest since 1971, and the unemployment rate resiliently stayed at 4.9% for the fourth quarter in a row, both suggest that the economic agents are still in a wait-and-see mode. Also, average weekly earnings in Great Britain grew by 2.3% for both incl. and excl. bonuses as compared to a year earlier.

In the period ahead, the labor market conditions are set to worsen. The household purchasing power will gradually be more contained amid relatively quickly accelerating consumer prices (September inflation picked up to 1% from 0.6% in August).

Normally, inflation should be a driving force to demand higher wages. Yet, in a very uncertain (Brexit) environment businesses are likely to cut down investments, reduce search for efficiency and productivity, and as a result limit hiring and pay awards.

We expect the unemployment rate to edge up higher, to 5.3%, while 3m y/y pay growth is set to ease to 1.8% by the end of the year. The unemployment rate will likely accelerate to 5.7% next year and wages are expected to drop to 1.3% in 2017.”