UK unemployment rate falls to 42-year low but wages subdued

Employment figures often lag developments in the wider economy so the recent slowdown may not be felt for some months. The impact could be accentuated if Britain’s Brexit talks, which began in earnest last month, fail to make much headway in the coming months.

“Historically unemployment is a ‘lazy indicator,’” said Ben Knight, professor at the Warwick Business School. “I would expect unemployment to rise if the Brexit effect on GDP growth turns out to be significantly negative, but it could be the end of the year before we can discern any effect of the Brexit vote.”

Worries that Britain could crash out of the EU in March 2019 with no trade deal with its former partners is, according to most economists, the biggest risk facing the country, a worst-case scenario that could lead to many firms ditching the country for continental Europe. In such a situation, Britain would operate under World Trade Organization rules, which would see tariffs slapped on many of the country’s exports.

Credit ratings agency Moody’s warned Wednesday that Britain’s growth prospects could be materially weaker if no deal for privileged trade access to the European single market is agreed on. Rival Standard & Poor’s delivered a similarly bleak appraisal Tuesday.

“It remains unclear whether the U.K. government can eventually deliver a reasonably good outcome,” said Kathrin Muehlbronner, a Moody’s senior vice-president. “The likelihood of an abrupt — and damaging — exit with no agreement and reversion to WTO trading rules has increased compared to our expectation directly after the referendum, with the government so far pursuing objectives that imply a ‘hard’ exit.”

Concern over the impact of Brexit is the main reason why the Bank of England cut its main interest rate last August to a record low of 0.25 per cent.

However, some members of the bank’s Monetary Policy Committee think rates should go up now as inflation is running above the 2 per cent target, at 2.9 per cent, and unemployment is falling. The Federal Reserve in the U.S. has similarly voiced concern about rising inflation and a tight labour market, and it has been steadily raising interest rates.

Other Bank of England rate-setters, however, point to the continued weakness of wage growth as a source of concern. Wednesday’s figures showed average weekly earnings for employees increased by 1.8 per cent including bonuses, and by 2.0 per cent excluding bonuses, compared with a year earlier. Both are below inflation, meaning that living standards are falling, a development that’s likely to weigh on spending in the months to come as it has done over the previous few.

Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, said the recent fall in consumer confidence will also likely make workers even less willing to change roles, decreasing the pressure on employers to offer higher salaries.

“So despite low unemployment, we continue to expect wage growth to remain in the low 2’s, placing little pressure on the MPC to hike rates,” he said.

Pan Pylas, The Associated Press

by Canadian Press

UK unemployment rate falls to 42-year low but wages subdued

Our Community