The UK job market is showing signs of a potential turnaround, with a recent, more modest decline in payroll employment hinting that the most severe impacts of significant tax increases and Living Wage hikes may now be in the rearview mirror.
Despite better news on wage growth, allowing the Bank to potentially cut rates in November, last week’s hawkish meeting has made this less certain, ING Group said in its latest update.
A striking aspect of August’s Bank of England decision was the apparent lack of concern among policymakers regarding the job market, despite a significant recent slowdown in hiring conditions.
However, the Bank’s view appears to be borne out by the most recent set of job numbers.
Economic figures
Payroll employment saw a marginal decrease of 8,000 workers from June to July.
This represents the smallest decline in the past nine months, despite marking the eighth monthly fall during that period.
“And given that these figures have a tendency to be revised up, it may transpire that employment actually grew slightly through July, once we get the final numbers,” James Smith, developed markets economist at ING Group, said in the update.
This tallies with some of the business surveys which suggest hiring appetite has begun to improve after a torrid spring.
In April, significant increases in National Insurance (payroll tax) and the National Living Wage created substantial challenges, particularly for the consumer services sector.
The hospitality sector, heavily dependent on low-wage employees, has experienced the majority of job losses over the past year.
This could also explain why, despite consistent payroll reductions, the number of redundancy notifications to the government has barely risen recently, according to ING.
Companies are only required to inform authorities of layoffs if they exceed 20 employees at a single location.
Since many hospitality businesses are likely smaller than this, the current data probably doesn’t fully reflect the sector’s struggles.
Bank of England’s stance
Despite current conditions, the Bank of England cannot disregard the state of the jobs market, Smith said.
A broader perspective reveals that job vacancies across almost all sectors are now below pre-COVID levels, often significantly.
The persistent decline in job openings shows no signs of abating.
Compared to pre-pandemic figures, the number of vacancies has decreased more significantly than in the US, France, and Germany, according to data from Indeed.
This year, the unemployment rate has also increased. However, this data remains questionable due to persistent reliability concerns.
Private sector regular pay growth, while remaining at 4.8% annually, showed a more modest increase on a month-on-month basis. This trend is contributing to a gradual decline in wage growth.
Smith added:
We think private sector wage growth will fall back to 4% or below by the end of the year. If that happens, that’s still a good reason to think the Bank of England will cut rates again in November.
While ING’s primary expectation remains unchanged, last week’s unexpectedly hawkish meeting suggests a potential shift.
The Bank of England might choose to maintain its current stance until the end of the year, if jobs figures are stronger and inflation remains higher-than-anticipated, according to ING.
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