UK: Highest wage growth since the beginning of 2009

The UK labour market statistics released today show that wage growth accelerated in April. Average weekly earnings excluding bonuses (three-month average) increased to 2.7% y/y in April from 2.3% in March (which was revised up from 2.2%) and thus wage growth is at its highest level since February 2009. Wage growth in the private sector is at 3.2% y/y. Higher wage growth is important for the timing of the first hike and thus today’s release supports our (non-consensus) call that Bank of England will hike already in November this year.

The combination of increasing wage growth and very low inflation implies increasing real wage growth, which is at its highest level since September 2007. As inflation is mainly low due to the drop in energy and food prices, this supports private consumption and thus the UK recovery.

The unemployment rate (3M) was unchanged at 5.5% in April in line with both our expectation and consensus. The unemployment rate is more or less back to normal (as measured by the Bank of England’s estimated medium-term equilibrium rate), which is an indication that the slack in the labour has diminished.

The number of unemployed in April declined by 43,000 (3m/3m). This was lower than the increase in employment (+114,000 3m/3m), as the number of economic active persons increased by 71,000 3m/3m. From an economic perspective it is very positive that both employment and the workforce are increasing. However, the change in the claimant count level indicates that the decline in unemployment may have started to slow down.

There was no major news in the MPC minutes from the June meeting. MPC voted unanimously in favour of keeping the Bank Rate and the stock of purchased assets unchanged at 0.5% and GBP375bn respectively. The minutes state that the ‘Committee members’ views on the economic outlook [...] had not changed materially’. That said, there are still a few interesting parts in the minutes.

Firstly, the MPC thinks that private consumption will rebound in the coming quarters after the slowdown in Q1 and thus that the ‘dip in [GDP] growth would prove to be temporary and that growth would be stronger in Q2’.

Secondly, there were some comments on the impact of fiscal consolidation. The Chancellor of the Exchequer, George Osborne, is presenting the budget on 8 July and the MPC ‘would have the chance to assess the updated fiscal projections in the preparation of its August inflation report’. It also stated that ‘it was likely that fiscal consolidation would continue to weigh on growth for some time’. The drag on growth from fiscal policy the coming years has become an important factor for the timing of the first hike and is a downside risk to our November call. Also, the fiscal consolidation could mean that the Bank Rate may be increased even more gradually than currently expected.

Thirdly, as expected, there was no major discussion about the fact that UK fell into deflation as the MPC members expect this to be only temporary (as confirmed by yesterday’s release of May inflation, see also UK: Only one month of deflation –inflation to pick up in H2, 16 June).

Fourthly, MPC sees signs that wage growth is picking up. Accounting for the composition of employment growth, the underlying pay growth ‘could be running at an annual rate somewhat stronger than the AWE measures’. This was more dovish than in previous minutes.

The GBP rallied on the strong UK wage growth. We target EUR/GBP at 0.70 in 3M and 6M but risks are that the cross temporarily undershoots our 3M and 6M estimates.

See the following page for illustrative charts.