14 September 2021
Thomas Pugh, economist at RSM UK, said: ‘The remarkable labour market recovery continued in July, but the next big hurdle will be the ending of the furlough scheme in September. There may be a temporary rise in the unemployment rate as some of these workers have to find new jobs. But we think the economy will be strong enough to quickly reintegrate most of these workers. The unemployment rate will probably still be around 4.6 per cent by the end of the year before gradually falling in 2022 as the economy continues to recover.
‘The fall in the unemployment rate from 4.7 per cent in June to 4.6 per cent in July was driven by a 183,000 rise in the number of people in employment. August also looked good with the number of payroll employees rising by 241,000 to 29.1m, the same level as in February 2020 before the pandemic. That said, vacancies rose above 1m for the first time ever, so labour shortages are likely to persist for the rest of the year and into 2022 in some sectors.
‘At the same time headline pay growth fell from 8.8 per cent 3myy in June to 8.3 per cent in July. Pay growth is still being heavily distorted by the pandemic, but we think that underlying pay growth is probably around 2.5 per cent, similar to its pre-pandemic level.
‘We see the risks as pretty equally balanced at the moment. On the upside there is clearly a risk that the prospect of large pay rises in some industries spooks the MPC into tightening monetary policy in the first half of next year, before the economy has properly recovered from the pandemic. On the downside, unemployment could rise by more than we expect if laid off workers fail to reintegrate into workforce, which would push back the start of policy tightening to the end of 2022, or even into 2023.
‘Our central view, though, is that as long as underlying pay growth across the wider economy remains relatively steady and inflation expectations don’t jump then the MPC will probably continue signalling that rate hikes are still some way off.’