Bank of England "Pausers" Will Welcome Fresh Evidence Labour Demand is Slumping

The demand for labour at UK businesses has fallen sharply in a signal the labour market is cooling, which should allow the Bank of England to press the pause button on its interest rates hiking campaign say economists.

The Recruitment & Employment Confederation (REC) says its August Report on Jobs survey showed permanent placements fell at the quickest rate since June 2020.

At the same time, an upturn in candidate availability gathered pace.

Above: Permanent placements and temporary billings indices, source: REC.

Increased supply of labour amidst waning demand will place downward pressure on wages, which the Bank of England is hoping will further cool inflation.

"August’s Report on Jobs survey provides more ammunition to the core members of the MPC—Governor Bailey and Chief Economist Pill—who have recently expressed their view that interest rates probably don’t need to rise much further, if at all, in order to sustainably return CPI inflation to the 2% target," says Gabriella Dickens, Senior UK Economist at Pantheon Macroeconomics.

The REC said hiring activity across the UK continued to be dampened by a weak economic outlook and reduced confidence among businesses.

The survey revealed permanent placements contracted at the quickest rate for just over three years and temporary billings growth weakened notably from June. Total vacancy growth meanwhile slowed further, hitting a 29-month low in July.

The overall availability of staff meanwhile rose at a substantial pace amid the slowdown in recruitment and reports of redundancies.

Above: REC wage findings compared to the official figures. Image courtesy of Pantheon Macroeconomics.

Notably, the latest upturn in total labour supply was the steepest recorded since October 2009, when excluding the pandemic period, noted the report.

The report also finds signs of pay pressures moderating again in July, although permanent salaries continued to rise at a sharp pace overall.

Pantheon Macroeconomics notes the REC survey has recently been too gloomy in signalling declining employment when put up against the official figures. This is likely because the survey is based on recruiters, not firms, "so it isn’t registering the recent trend for businesses to hoard labour, due to fears they may not easily be able to replace them further ahead," explains Dickens.

However, Pantheon Macroeconomics considers the REC's findings alongside those of other surveys, such as the PMIs, and reckons the UK unemployment rate will rise steadily to end this year at 4.5%.

Signs of an easing labour market follow Thursday's Bank of England Decision Makers Panel findings which showed inflation expectations at UK businesses have fallen sharply.

The evidence that the Bank of England is looking for to justify a pause in the interest rate hiking cycle is therefore building, underscoring Governor Andrew Bailey's comments to parliament this week that the peak in interest rates is close.

Markets remain fully priced for a rate hike in September, but this week has seen markets scale back expectations for a further hike in November.