The Bank of England (BoE) is signalling that it’s becoming more concerned about the UK’s labour market – and seemingly with good reason. There is ample evidence that the labour market has weakened since the Autumn Budget in October and that the weakness has accelerated since April. However, so far there’s little evidence of a collapse in employment. There are also some good reasons to think the worst has already passed.

The BoE’s concern is exacerbated by the fact that it’s very difficult to get a clear idea of what’s happening in the labour market. The Labour Force Survey (LFS), once the gold standard for employment data, has seen a collapse in response rates over the last decade, which the pandemic accelerated. That has made the data unreliable. As a result, we now have to rely on a number of labour market indicators, but each of these has its own problems. The number of people on HMRC payrolls, for example, is more timely, but doesn’t capture the self-employed. It’s also very prone to large revisons, which makes it difficult to interpret.

That said, there are some trends that are apparent in almost all the data. The first is that the labour market has materially weakened since the Autumn Budget. The unemployment rate has risen from 4.3% in October to 4.6% in April and the number of people on HMRC payrolls fell by 276,000 between October and May. What’s more, the number of vacancies has dropped to just 736,000: that’s the lowest level since 2015, excluding the pandemic. The second is that the weakening seems to have accelerated since April. Indeed, the number of people on HMRC payrolls dropped by a whopping 109,000 in May alone.

Adding to the evidence that the falls are mainly due to the policy changes made in the Autumn Budget is that weakness is concentrated in those sectors most impacted by increases in the National Minimum and National Living Wages and National Insurance taxes. Employment in accommodation and food services has dropped by 85,000 since October and by 61,000 in the retail sector. This means 53% of job losses have come from sectors accounting for just 20% of total employment.

Yet, there are some reasons to think the scenario suggested by the data is not quite as bad as it looks. Payroll numbers are very volatile and the dramatic fall in May is likely to be revised up. People switching from employee to self-employed status to avoid higher taxes may also be distorting the picture. In addtion, most surveys are suggesting that the worst is behind us. As uncertainty recedes and economic growth rebounds from a dismal Q2, employment should pick back up.

It’s also clear that the employment market isn’t collapsing. Redundancy levels haven’t shifted from trend and jobless claims are falling. It looks more like many firms have just pressed pause on hiring, rather than letting people go.

This all has three important consequences.

First, for the BoE the state of the labour market is a crucial factor when deciding to cut interest rates. If the labour market is weakening rapidly, then pay growth should slow rapidly, which will lower inflationary pressures and allow the BoE to cut rates more quickly.

Second, since the UK economy is primarily driven by consumer spending, a weaker labour market means less spending and slower growth. Indeed, a big drop in employment would risk plunging us into recession.

Third, for the Chancellor the combination of lower taxes and higher welfare spending that would come from a big drop in employment would blow the fiscal rules out of the water. Welfare spending is already set to rise by significantly more than any other catergory and it’s largely out of the Chancellor’s control in the short term.

To sum up, the labour market has weakened significantly over the last six months. Our forecast is for employment to stabilise and start trending back up over the rest of the year as uncertainty recedes and growth rebounds. But, a jump in unemployment is one of the biggest risks to growth and the fiscal deficit this year and next.

Stamp duty rush dampens June’s house prices, but not outlook

We expect house prices to fall slightly in June by around 0.3% m/m.

Prices will continue to normalise after buyers front-running Stamp Duty boosted prices in Q1, which will be a drag on growth for the next couple of months. By how much, though, is the big question for consumer confidence and household spending.

Near-term indicators of activity, such as RIC’s price expectations balance, point to a sharp weakening in house price growth. A straight read of this would suggest the annual rate slowing to around 0.5%. We think this is overdone because surveys tend to overreact to negative sentiment.

That said, the Nationwide house price index surprised last month, growing 0.5% m/m. It looks like house prices will continue to grow at around 4% this year as mortgage rates fall and real income growth continues to boost affordability. This is better news for the growth outlook and perhaps the Chancellor’s delicate fiscal balancing act as we head towards her second Autumn Budget.

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