A goldilocks scenario for UK employment

UK employment outlook brightens

There was good news for the UK economy, the economy created 373k jobs in the three months to August, the unemployment rate fell a notch to 4% from 4.1%, and average weekly earnings dropped to 3.8% from 4.1% in July. These are strong labour market figures for the UK, however, the data slipped in September, which is in line with other weaker economic indicators that have been released in recent weeks.

The number of payrolled employees fell by 15,000 in September, and the jobless claims data was a notch higher at 4.7%, compared to 4.6% for August.

Inactivity still a problem for the UK, but it’s getting better

While the data may have slipped in September, there is no doubt that the labour market had a strong quarter. According to the ONS, the UK employment rate was 75% between June and August, above estimates of a year ago, and increased from the previous quarter. The unemployment rate is also lower than the previous quarter, and, although still high at 21.8% in June to August, the economic activity rate for people aged 16 and over, is also lower than a year ago, and has fallen since the prior three months. However, the UK still has too high a proportion of inactive workers, and this is an area that the Chancellor should target in this month’s Budget. The inactivity rate is now back at May 2023 levels, however, it is still above pre-pandemic levels, especially between 2015 – 2020, when the inactivity rate plunged.

The UK labour is tight, but less tight than previously thought

The ONS also said that job vacancies have been trending lower, however, they remain above pre-pandemic levels and stand at 841k. Thus, the jobs market remains tight by historical standards. Also, the total number of payrolled employees stands well above pre-pandemic levels at 30.3 million people. This makes the weak productivity in the UK an even bigger mystery.

The pound has ticked higher on the back of this report, and it is above $1.3050 vs. the USD, at the time of writing. However, this pair is still looking weak. We do expect GBP/USD to continue to stage a mini rally on the back of this data and GBP/USD could make a meaningful move higher later today. Right now, that would be targeting resistance at $1.3070, ahead of $1.31.

Nominal wage growth moderation, but real wage growth gains

Average weekly earnings growth for the whole economy on a 3-month annualized basis was 3.8%, the lowest level since 2020. However, real wage growth, when adjusted for inflation is still in positive territory due to the rapid decline in price growth.  Real wage growth was 1.9%, down from 2.2% in the previous reading. However, Wednesday’s inflation report is expected to show that price data in the UK fell to 1.8% in September, which will boost real wage growth even further. Thus, falling inflation, combined with strong real wage growth could spur a burst of consumption in the coming months, which may boost Q4 growth.

Why GDP will have a bigger impact on BOE rate cut expectations

Overall, this is a solid report, that could boost the pound. However, we don’t expect much of a shift in UK rate cut expectations. Although wage growth moderated, the employment picture in the UK has strengthened. There is still a rate cut priced in for the UK for next month, and 4.5 further rate cuts priced in for this cycle. If we get a weak Q3 GDP reading, then that is more likely to shift the dial on rate cut expectations, in our view.

The oil price tumbles as Israel stops short of a direct attack on Iran

Elsewhere, FTSE 100 futures are pointing to a weaker open, with the index currently expected to open lower by 0.2%. The oil price is tumbling yet again on Tuesday, and it is currently lower by more than 3%, Brent crude is back below $75 per barrel. The price of oil has been volatile in recent weeks, as it gets jostled around by news flow surrounding the Middle crisis. The latest news suggests that Israel will not directly target Iran, and so an escalation premium is being removed from the oil price right now. This could hit the FTSE 100’s oil companies later today, and the energy sector could extend its decline after it was one of the weakest performers on Monday.