The UK labour market continues to perform well, according to the report released today. The basic story of employment rising and unemployment falling continues. There were 31.12 million people in work, 140,000 more than for March to May 2015, and 359,000 more than for a year earlier. This drove the employment rate (the proportion of people aged from 16 to 64 who were in work) up to 73.6 per cent — the highest since comparable records began in 1971. It also helped the unemployment rate fall to 5.4 per cent — lower than for March to May 2015 (5.6 per cent), and for a year earlier (6.0 per cent). In fact, unemployment has not been lower since March to May of 2008.
Workers continue to enjoy decent earnings growth. Comparing June to August 2015 with a year earlier, pay for employees in Great Britain increased by 3.0 per cent including bonuses, and by 2.8 per cent excluding bonuses. Given the total lack of inflation at present, all the growth in earnings is going to higher living standards and should allow consumption to power the economy in coming quarters. Those looking for signs of a pick-up in productivity will focus on the continued drop in average hours worked, which extends the trend seen this year. With the labour force also increasing, it appears that the supply side of the economy has some room for growth, for now.
In such a data-rich report, disappointments can always be found. The level of vacancies dropped slightly and the number of redundancies rose a touch. However, there are still over six vacancies per redundancy in the UK, indicating companies’ willingness to expand their labour force. What’s more, there are still about 2.5 unemployed people per advertised vacancy, which is around the pre-crisis average.
Investment implications and market reaction
After the release, sterling rose slightly against the US dollar as traders focused on the support provided by wage growth and lower unemployment for higher UK interest rates from the Bank of England. Further evidence of wage growth and domestic inflation will certainly bolster that case, but we feel that many factors need to fall into line for the Bank to raise interest rates before May next year. For now, the Gilt market looks well supported by lower rates internationally and global disinflationary pressures. UK equities that are tied to the economic strength of the UK should see positive earnings growth. However, investors need to think carefully about how to target their exposure within the UK equity market, given the impact of international and commodity-related exposure on relative performance in recent years.