UK: Improvement in the labour market has slowed down

The UK labour market report shows that the ILO unemployment rate (three-month average) in November fell more than expected to 5.8% (consensus: 5.9%, Danske Bank: 5.9%). This is the lowest unemployment rate in six years. We are not far from the Bank of England’s estimated medium-term equilibrium unemployment rate at 5.5%.

Even though the UK labour market is still improving and the unemployment rate declined to a six-year low, the pace has slowed down in recent months. The number of unemployed persons fell by 58,000 in June-August to September-November. In the same period, employment increased by 37,000, which was less than expected, implying that a decline in the labour force also contributed to the fall in the ILO unemployment rate.

The claimant count level in December declined by 29,700 persons suggesting that unemployment will come down further.

Nominal wage growth (average weekly earnings excluding bonuses three-month average) has been increasing since May 2014 and is now at 1.8% y/y, which, however, is still subdued from a historical perspective. Real wage growth, which has been negative since 2009, has now been positive for two consecutive months due to a combination of increasing wage growth and low inflation. It is likely that real wage growth will remain positive in 2015 as inflation is expected to stay low and wage growth could pick up further due to the tightening labour market. If this is the case, this will support UK growth going forward.

The Bank of England also released its minutes from its January meeting today. For the first time since August 2014, the Monetary Policy Committee voted unanimously in favour of keeping the Bank Rate unchanged at 0.50%. Ian McCafferty and Martin Weale, who previously voted in favour of increasing the Bank Rate by 25bp immediately, now assess that ‘low inflation might persist for longer than the temporary factors implied and concluded that this risk would be increased by an increase in the Bank Rate at the current juncture’.

The combination of low inflation, subdued wage growth and continued slack in the labour market implies that the Bank of England can be patient in increasing the Bank Rate. We expect the first hike in Q3 15 at the earliest.