Preview: UK Jobless Rate To Fall; Wages To Pick Up Only Slightly

The UK labor market is expected to strengthen further, with the jobless rate falling, although with wage growth picking up only slightly.

google.images.com / Via wbponline.com

by Vladimir Harman
WBP Online correspondent in London

London - Although still fragile, economic output has been rising at the fastest pace among the world's seven most advanced economies while the labor market has been tightening sharply since last summer. However, what is still hampering a more sustainable, long-term growth is weak productivity and meager wage growth - the puzzle keeping Bank of England (BoE) policymakers busy in recent months and allowing them to hold on to ultra-loose monetary policy.

The jobless rate decreased surprisingly sharply from 7.7% in August last year to 6.4% in June this year. In the quarter to July, the unemployment rate is estimated to have fallen further, to 6.3%, while the claimant count rate is expected to have dropped to 2.9% with the level down by another 30,000 claimants, both between July and August.

The Office for National Statistics (ONS) is releasing new labor market data on Wednesday morning, coinciding with the Monetary Policy Committee (MPC) meeting minutes release. Both sets of data are expected to increase volatility.

In monetary policy decisions, the UK jobless rate lost its importance after the BoE introduced the second phase of forward guidance in February this year, when it brought more variables into the spotlight to enable it to measure slack in the labor market in a more structured way. Since then, wage growth has acquired significance as the key determinant for the medium-term inflation outlook - the BoE's most fundamental gauge.

So far, wage growth has been substantially below its pre-crisis peak, when it stood at 4.1% in January 2008. Earnings also remain below the rate of inflation which in turn translate into more squeezed households' budgets and weaker consumption.

In the three months to July, average weekly earnings excluding bonuses is expected to have picked up only slightly by 0.7%, up from the record low growth of 0.6% a month before. Total pay, which includes bonus payments, should rise 0.5%, compared with a decline of 0.2% in quarter to June.

BoE Governor Mark Carney said last week in Liverpool that the current wage pressures were now as low as if the unemployment rate were around 10%, not the 6.4% it actually is today. But he also added that "there are some leading indicators that point to a modest pick-up over coming quarters."

"As employment approaches its new higher level, wage pressures should increase and capital investment should continue to recover. Productivity growth should pick up bringing the higher, sustainable pay rises," Carney said and added that the MPC expects it to take the better part of three years for this to happen.

The August MPC minutes showed that two dissenters, Martin Weale and Ian McCafferty, who voted for a 25bp rate hike in August, argued that wage growth might lag behind the rest of the labor market data. If that was true, they said, "wages might not start to rise until spare capacity in the labour market were fully used up … And since monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them."

It will therefore be essential for BoE watchers to keep an eye on the labor market data through the rest of the year for indications of the short-term policy outlook. "Wages are the one missing ingredient for a rate hike. That gives the BoE room to wait before hiking rates. Tomorrow’s labour market data, and those data through the winter, will therefore be key to the interest rate outlook," Berenberg Bank UK's chief economist Robert Wood wrote in a note on Tuesday.

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