UK Unemployment Forecast to Jump in 2017

ubs exchange rate forecasts 1

The UK employment rate has fallen to a fresh multi-year low at 4.8% it was revealed in November's labour market report but one forecaster warns it will rise sharply in 2016 as Brexit starts to bite.

November's official employment and earnings data release which covers September and October 2016 shows further improvement overall. 

But that improvement is taking place at a slowing rate.

According to data from the ONS, the UK's unemployment rate unexpectedly slipped to 4.8%, its lowest level since 2005. 

The claimant count rose by 9.8K, well above the 2K forecast by economists.

Average earnings with a bonus included rose 2.3%, unchanged from the previous month's 2.3%.

"Today’s figures confirmed the indications from the surveys that the leave vote is starting to sap the jobs recovery of its previous strength. Employment growth slowed sharply – with the 49,000 rise in the three months to September down from August’s 106,000 and well below the consensus forecast of 91,000," says Ruth Gregory, UK Economist at Capital Economics.

Economic Weakness Ahead

Analysts at UBS say this relative resillience in the labour force will not last.

UBS believe the UK’s current steady economic growth is a short-term effect almost entirely due to the fall in the Pound.

“The resilience of activity in the wake of the referendum on EU membership in June 2016 has been primarily a result of the very large depreciation of Sterling, which has declined by 20% on a trade-weighted basis over the past year,” states UBS Economist Arend Kapteyn.

The weak Pound has helped exports and kept the economy going but the effect is unlikely to be sustained over the medium-term, argues Kapteyn, as the negative side-effects increasingly feed-through in the form of rising inflation.

Since most UK exports are made up of combinations of foreign components which have to be imported, Sterling's weakness makes those components more expensive, offsetting some of the gains from increased demand.  is not as beneficial to the economy as it would otherwise be if components were homegrown and more value was added in the UK manufacturing process.

This makes UK exports less beneficial to the economy compared to nations where the majority of sub-components are homegrown allowing more value to be added during the manufacturing process.

Rise in Unemployment Forecast for 2017

The unemployment rate is forecast to rise again when Brexit starts to become a reality.

UBS forecasts the rate to rise from its current 5.0% to 5.5% in 2017 and 6.3% in 2018.

The main driver for unemployment will be a combination of slowing growth due to inflationary pressures and companies playing “defensively” when it comes to hiring new staff around the time of high uncertainty which will accompany the triggering of Article 50.

This I likely to have a negative knock-on effect on, wages, spending, consumption and growth.

“Nominal earnings are likely to stay soft in such an environment, and real wages should, therefore, be squeezed hard.

“Consumption and investment are both likely to slow next year, and are the key drivers of our expectation of weaker growth over the next two years,” says Kapteyn.

Capital Economics' Gregory agrees saying the 9,800 rise in the timelier claimant count measure of unemployment in October – which is a useful guide to future movements in the headline LFS measure – and the weakening in the employment surveys suggest that employment growth will probably slow further.

"This moderation should prevent wage growth from picking up in coming months."

Bank of England to increase Monetary Stimulus in 2017

As a result of an expected slowdown in the labour market analysts are expecting the Bank of England to act and provide further support.

UBS expect the BOE to cut interest rates and perhaps even raise stimulus in 2017.

The BOE will raise rates despite inflation rising because the inflation will be almost all because of the weak pound, and not due to growth.

The stimulus will be to help continue supporting growth during Brexit negotiations and the triggering of Article 50.  

Government May Not be as Generous as Expected

Hopes that UK fiscal policy will be generous may be dashed according to UBS.  

“We expect any stimulus to be modest in scale, at least for the time being.

“The government continues to make clear its intention to eliminate the budget deficit when possible, even if it acknowledges a near-term need to allow automatic stabilisers to fully deploy and is open to the idea of a degree of front-loading of scheduled infrastructure spending,” remarks Kapteyn.