UK Jobs Data Leaves Economists Weighing Prospect of Bank of England Interest Rate Cut

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- UK unemployment rate falls back to 1970's era low. 

- But wage growth and vacancy numbers disappoint.

- Number of job vacancies continues gentle decline.

- Mixed data comes amid continued growth slowdown.

- Capital Economics warns of BoE rate cut next year.

- Pantheon Macro sees Brexit deal averting BoE cuts.

The unemployment rate fell back to a 1970s era low in the recent quarter but the jobs market has already seen its best days for the current cycle, official data suggested on Tuesday, and economists are now contemplating the prospect of a Bank of England (BoE) interest rate cut in the months ahead. 

UK unemployment fell back to 3.8% during the three months to the end of October, Office for National Statistics figures showed Tuesday, when markets were looking for it to remain unchanged at 3.9%. With recent readings aside, that's the lowest unemployment rate seen in the UK since the early 1970's.

This was after overall employment grew by 24k during the period, faster than the 14k expansion envisaged by the market, which kept total employment growth running at an annualised rate of 1%.

"The larger-than-expected rise in employment in October suggests the labour market is not getting any worse and may have even started to turnaround. That will probably allow the Monetary Policy Committee to hold off cutting interest rates at Thursday’s meeting," says Andrew Wishart at Capital Economics

The jobless decline came despite an unchanged economic inactivity rate, which remained at 20.8% last quarter. The inactivity rate measures the number of individuals who are unemployed but not available or looking for work. Their treatment in the data can artificially reduce the unemployment rate. 

Meanwhile, average weekly earnings grew at an annualised pace of 3.2% when bonuses are included in the measurement and 3.5% for regular pay. However, consensus was looking for wages to increase by 3.4% when bonsuses are included so the numbers were likely a disappointment to the market. 

The number of job vacancies in the UK also continued to fall during the recent quarter, with the total number declining by 20k to 794k. Vacancies have increased since 2012 as the economy created jobs, facilitating a sharp reduction in unemployment, but have declined throughout 2019. 

"GDP growth appears to have stagnated in the fourth quarter, and surveys of hiring point to employment growth slowing decisively. With Prime Minister Johnson determined not to extend the transition period, Brexit uncertainty won’t disappear either. The upshot is that there is larger chance of a rate cut early next year than most other forecasters think," Wishart warns. 

Markets care about the labour market data because falling unemployment and improving job creation are thought to put upward pressure on wages. Pay growth leads to increased demand in an economy and upward pressure on inflation, with implications for interest rates and financial markets. 

The BoE has been saying for years that wage growth will lead inflation to overshoot the 2% target unless it raises interest rates, but inflation fell further below the bank's target in October and the jobs markets is now cooling. Inflation was 1.5% in October while core inflation was 1.7%. The bank will announce its next interest rate decision at 12:00 on Thursday.

Lesser vacancies and slower growth could weaken the bargaining power of workers and undermine the BoE's view that wage growth will push prices higher in the coming years, which might mean that a rate cut is becoming for likely. Some analysts say cuts are on the way, although not everybody agrees.

"Demand for labour remains strong enough to stop the MPC from cutting Bank Rate over the coming months," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. "We know from business surveys that firms have held back from hiring due to near-term Brexit and political risk. Job postings should rebound in early 2020, as corporate confidence recovers."

The economy was up just 0.8% for 2019 at the beginning of the final quarter, which means it would take a very strong finish to the year for the UK to meet the consensus for GDP growth of 1.3% in 2019. But such a strong finsish is unlikely if the IHS Markit PMI surveys are anything to go by because those have been pointing to a final quarter economic contraction for months now.

Pantheon's Tombs says wage growth should remain above the 3% threshold over the next year, which he forecasts will prevent the BoE from cutting Bank Rate anytime soon. However, that projection is partly contingent on uncertainty about the UK's Brexit pathway dissipating in the months ahead and there are reasons to think it might not.

Prime Minister Boris Johnson reportedly plans to enshrine the end of 2020 into law as the end of the next phase in the Brexit negotiations and the 'transition' period the UK will enter once the withdrawal agreement is ratified and the country formally leaves the EU on January 31.

In other words, the PM intends to make year-end 2020 the date 'Brexit' takes place irrespective of whether future trade arrangements have been agreed. That could be bad news for economists and markets, who in recent days had come to view the prospect of an exit from the EU on World Trade Organization (WTO) terms as all-but banished given how Johnson's 80 seat parliamentary majority reduces the hold that Brexit-supporters have over him in parliament.


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