UK wage growth moderates, as Ocado delivers Christmas cheer

The wage data was always going to be the metric worth watching in today’s labour market report from the UK.  Central bankers around the world are closely monitoring wage growth to determine when to cut interest rates. The UK data is encouraging for central bankers, average earnings excluding bonuses saw growth slow to 6.6% in the 3 months to November, down from the 7.2% rate registered for the three months to October. Including bonuses, the drop in wage growth was larger than analyst estimates, falling to a 6.5% 3-month growth rate in November, down from 7.2%, and below the 6.8% expected by economists.

Wage growth on track to beat BOE’s forecast

Wage growth, like other inflation metrics, is slowing sharply in the UK. The Bank of England’s forecast for wage growth in its November Monetary Policy report was for a fall to below 6% by the spring. If this trend continues, then average wage growth could reach this level before then, which could support BOE rate cuts.  On the surface, 6.5%, wage growth is still high, but real wage growth, which is adjusted for inflation, was 1.3% for total pay and 1.4% for regular pay in November according to the ONS. Real pay levels in the UK have been trending higher as inflation has fallen, however, they have started to level out. Real wage growth at 1.4% for regular pay is lower than the BOE’s 2% target for inflation and is thus unlikely to induce a wave of consumption, especially since consumer confidence remains firmly in negative territory.  

UK: wages still higher than peers

The UK’s wage growth rate is trending lower; however, it remains at elevated levels compared to its peers. In December, average hourly earnings in the US were 4.1% YoY. Less timely data from the Eurozone showed that hourly labour costs in the currency bloc rose by 5.3% in Q3 2023.

UK labour market showing signs of loosening

The number of job vacancies fell by 49,000 in Q4, however, overall job vacancies are still 934,000, which is above prepandemic levels, according to the ONS, and is higher by 133,000 since Q1 2020. This suggests that there is an element of tightness in the labour market, although the vacancy rate trended lower throughout 2023.  The other bright spot in this report was employment growth, which expanded by 73k in November, up from a 50k increase in October. Employment growth has been expanding since September and it suggests that the UK labour market was able to see expanding employment growth at the same time as wage growth moderated. This will be a positive development for the BOE, and if the trend continues in the coming months, then it supports the goldilocks narrative that the economy is not too hot or too cold.

It is worth remembering that the labour market data is still being revised by the ONS. It’s adjusted experimental unemployment rate was 4.2% in Q4. This is unchanged vs Q3, but it is higher than pre pandemic levels, back in Q1 2020 the UK’s unemployment rate was 3.9%. The experimental economic inactivity rate trended lower in Q4; however, it remains above the pre-pandemic rate. The experimental figures from the ONS need to be treated with some caution, however, they do indicate that the UK labour market was  mostly unchanged in Q4, and that interest rates at their highest level for 15 years have yet to hurt the UK jobs market in a meaningful way, even if the recruiters are having a hard time.

Tuesday’s labour market data has defied fears of a deteriorating jobs market, after recruitment firm Pagegroup became the third recruitment firm this year to report that a slowing labour market was hurting its performance. Pagegroup said that a deterioration of ‘job flow’ in Q4 weighed on its performance at the end of last year. The labour market data released on Tuesday wasn’t as gloomy as the recruiter updates, however, it is a lagging economic indicator, thus the warning signals coming from the UK’s largest recruiters suggest that there could be a faster slowdown to come for the UK’s jobs market. This was reflected in the claimant count rate for December. It reported a  increase of 11.7k people claiming unemployment benefits, which is the highest rate since June.

The pound is lower on the back of the labour market data, however, the dollar is rising across the board. The FTSE 100 has also opened lower as risk aversion knocks market sentiment.

Ocado gets into the Christmas spirit

Elsewhere, there was good news for Ocadas it had its best ever Christmas period. Overall for Q4, it announced that retail revenue growth was 10.9% in Q4, vs a year ago,  up from a 7.2% growth rate in Q3. Average orders per week also grew by a decent 6.3% YoY. Active customers grew by more than 5% last quarter, which stands just under 1 million, at 998,000. Its M&S tie-up has continued to grow, with 90% of M&S products now available on Ocado. Like other supermarkets, the final quarter of the year was a bright spot for Ocado, and it reported its highest ever levels of sales over the peak Christmas trading period. This has propelled the stock price higher on Tuesday, it is up by nearly 6% so far.

The market seems happy to ignore its less upbeat outlook. It said that it expects to see sustained volume growth this year, however, it said that revenue growth could be impacted by lower growth in the average selling price as food price inflation starts to slide. Its revenue forecast for FY 2024 is currently expected to be in the mid-high single digits. This is a wide range and does not give traders much to go on.

Even with its opaque trading guidance, and signs that disinflation could thwart revenue growth down the line, Ocado’s share price has opened on a positive note, and is up more than 5% so far today. The market is cheered that Ocado is in line with the best performing traditional supermarkets, and after a weak year for Ocado’s share price, which has fallen 11.5% in the last 12 months, this stock may play catch up.