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January’s UK labour market data keeps the Bank of England on track for an August start to policy easing. Despite consensus looking for a set of prints in line with the December readings, this morning’s numbers instead showed modest easing across the board, indicative of a jobs market that softened marginally at the beginning of 2024.
After stalling towards the end of 2023, progress on cooling headline and core wage growth resumed at the start of the year. Nevertheless, unlike peer economies, this isn’t suggestive of imminent rate cuts. Headline paygrowth remains high at 5.6% 3m/YoY, and with underlying measures stronger still and April’s rise in the National living wage looming, we doubt that today’s reading will bring about a notable change in tone from the MPC later this month. This supports our base case of no policy action from the BoE until August, a view that is seemingly shared by traders as well with pricing of a June cut holding modest at just 50%.
The likely focus for policymakers within today’s data will likely be the wage indices once again.
Average weekly earnings fell by 0.2pp on a 3m/YoY basis to 5.6% in January, 0.1pp below market expectations. Similarly, once stripping out bonuses, pay growth eased only marginally from 6.2% to 6.1% 3m/YoY. Most notably though, the private sector regular pay measure closely watched by the MPC also fell 0.1pp to 6.1% in January on a 3m/YoY basis, though single month estimates indicated a sharper 0.4pp decline to 5.8% after the measure flatlined in Q4 2023. While this is progress in the right direction, on all measures pay growth remains too high to be consistent with the BoE’s 2% inflation target, a dynamic that will keep policymakers cautious given sticky year ahead salary expectations in the latest Decision Maker Panel. Private sector pay growth is, however, broadly on track to meet the BoE’s Q1 target. Only a modest easing in single month pay growth is now needed over the February and March releases to hit Bank staff estimates for pay growth of 5.7% 3m/YoY, a fact that should see commentary remain relatively unchanged at the BoE meeting later this month.
The other key piece of data that is likely to garner some market attention this morning is an update on the unemployment rate, which rose 0.1pp to 3.9%.
Granted, this remains well below BoE estimates of neutral for the UK economy. But given concerns over data quality, policymakers are likely to discount this measure, especially with it having tracked in the opposite direction to other labour market indicators since the series was resurrected. To this point, the drop from 4.3% in July to 3.8% in December looks suspicious to us. Given this, a reversal in today’s figures looks more like a correction to the previously misleading trend rather than anything more significant.
Even so, we would note that today’s unemployment rise is consistent with the January REC report on jobs which showed a notable drop off in the permanent placements index, which fell from 45.6 to 43.4 in January.
So too is today’s wage data given that the pay index eased modestly from 56.5 to 55.8 in the same period. With official labour market data having not always aligned with alternative indicators over the past year, the fact that both are now telling the same story should help build confidence across the MPC on the underlying dynamics of a cooling labour market. Looking forward, both readings fell only marginally further in the February report on jobs. This, we think, is consistent with a labour market that is progressively returning to better balance rather than an indicative of a more alarming slowdown, and as such, hardly likely to trigger BoE easing in advance of the full impact from April’s rise in the national living wage being visible in the official data.
Indeed, April’s rise in the NLW is arguably the single most important risk event left for the BoE, with recent commentary indicating that policymakers would like to see the impact on broader wage data before cutting rates.
To this point, the April wage data will be available just before the June MPC meeting, a fact that has been argued in some quarters to suggest that the BoE will feel comfortable with beginning their easing cycle in June. We disagree. Significantly, whilst the NLW officially goes up on April 1st, the rise does not have to be implemented until the beginning of the subsequent pay period. As such, Tesco, one of the UK’s biggest employers with more than 330,000 staff, is not increasing wages until April 28th. This would mean that any wage rise would likely fall in the May labour market figures, rather than in April. Similarly, Asda, whilst due to raise pay from £11.11 to £12.04, is set to do so in two phases, with only the first of these coming in April. As we have consistently argued, the BoE will need to see not just the immediate rise in the NLW, but also the second-round effects. As is becoming increasingly apparent, much of this will play out in releases following the April wage data, suggesting that an August start to rate cuts remains most likely from the BoE.
Author:
Nick Rees, FX Market Analyst