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UK faces rising unemployment and wage challenges!


UK faces rising unemployment, financial news

Recently, there has been an unexpected uptick in Britain's unemployment rate, reaching the highest level observed in the last six months as the total number of jobs across the nation has seen a decline. This trend suggests a cooling in what was previously considered a buoyant labor market. Specifically, statistics from the Office for National Statistics (ONS) reveal that the unemployment rate for the three months ending in February rose to 4.2%, up from 4% in the previous period ending in January, marking the highest rate since last summer.


The latest data indicates a possible easing of inflationary pressures within the labor market, although the situation remains complex. Despite the softening job market, wage growth remains high at a rate of 6%, only slightly down from the previous rate of 6.1% and still above the forecasts of many economists. This persistent high level of wage growth is a critical factor for the Bank of England, which closely monitors these trends to guide its decisions on controlling inflation.



Economic commentary from experts like Paul Dales, the chief UK economist at Capital Economics, suggests that the observed decrease in economic activities within the labor market is likely to lead to a quicker reduction in wage increases. He notes that if not for the apparent slowdown in the labor market, there could be greater concerns about the UK's disinflation process potentially stalling, mirroring recent economic patterns seen in the United States.


The persistent high wage growth has made UK policymakers hesitant to move away from their stringent anti-inflationary measures. The recent report indicating wages continue to rise above expectations complicates the Bank of England's strategy, essentially dismissing any remaining chances for a rate cut in the immediate future. Nevertheless, with increasing evidence of a loosening jobs market, the central bank may not be able to postpone the beginning of an easing cycle for much longer.



Projections suggest that the easing might start with a rate cut in June, with interest rates expected to end the year at around 4%. However, the ongoing robustness of wage growth could potentially slow this anticipated pace.


In recent weeks, the financial markets have adjusted their expectations regarding the Bank of England's (BOE) upcoming decisions on borrowing costs. This shift has been influenced by surprisingly strong inflation data from the United States and comments from hawkish members of the BOE's Monetary Policy Committee, highlighting similar risks within the UK. These factors have led to a recalibration of the likelihood of immediate rate cuts.


Following the publication of the labor market report, the British pound experienced a slight depreciation, dropping by as much as 0.3% to $1.2409. The futures market's predictions regarding the Bank of England's interest rate cuts have remained relatively stable, indicating an expectation of two quarter-point reductions by the end of the year. The market fully anticipates the first cut by September, with a significant likelihood of it occurring earlier, in August.



KPMG UK's chief economist, Yael Selfin, interprets the relaxation of labor market pressures as maintaining the Bank of England on a trajectory towards a rate cut during the summer. She highlights that the increase in the unemployment rate reflects a less constrained labor market, although there remains considerable debate about when the first rate cut will occur.


The ONS has been cautious about the accuracy of the official employment figures due to a significant drop in survey responses. This issue has led to repeated calls from the statistics office urging analysts and policymakers to interpret employment data with caution.


Despite the challenges in data collection, the unemployment figures for the latest quarter appear to align with what the Bank of England had anticipated for the entire first quarter of the year. In its February forecasts, the Bank of England expected the unemployment rate to increase to 4.4% by the time the first quarter readings were available.



However, the most recent labor market report from Tuesday paints a picture of deteriorating conditions on multiple fronts. Not only did the UK economy shed a significant number of jobs, but it also experienced an increase in the redundancy rate and a rise in economic inactivity among certain age groups. While some labor market tightness remains, as evidenced by a recent increase in job vacancies, the overarching trend indicates a market that is beginning to lose its previous strength.


The recent downward trends in job vacancies and earnings growth have continued this month, although at a diminished pace, according to Liz McKeown, the ONS director of economic statistics. At the same time, there are initial signs indicating that the labor market is beginning to cool down, demonstrated by reductions in both the headline employment rate and the total number of people listed on payrolls according to data from HMRC.


16.04.2024



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