“The apparently strong jobs market feels like the calm before the storm”

UK wages and employment: official data resilient for now – Rob Morgan, Chief Investment Analyst at Charles Stanley

The UK remains in an economic funk of muted activity, ebbing confidence and above-target inflation. No surprise then that various market surveys indicate firms are reluctant to hire staff and in some cases are looking to make cuts amid planned increases in employer NICs and the National Minimum Wage.

Today’s ONS numbers are not reflective of this emerging trend with the official unemployment count holding steady at 4.4% in March. Still low by historic standards, although the data needs to be taken with caution owing to collection issues. The only cracks showing so far are in the number of job vacancies, which continues to slide.

Meanwhile, the official measure of wage inflation continues at a robust 5.9% for February. This indicates there is still competition for workers and perhaps reflects the difficulty and cost to secure necessary skills if they are lost.

The apparently strong jobs market feels like the calm before the storm, however. Increases to employer national insurance contributions are likely to increasingly weigh on hiring decisions over coming months, and if economic conditions continue to deteriorate wage growth will surely moderate more sharply and unemployment numbers edge up.

This won’t apply to all businesses, though. Rather than make major adjustments to their workforce some may err towards passing on the higher costs through price increases. This could push up services inflation but keep unemployment low despite a drop off in hiring – creating a dilemma for the Bank of England in its battle against inflation.

Overall, we are likely to see a mixture of these two responses with a moderate tail off in employment trends combined with some extra pressure on prices.

What does it mean for interest rates?

The BoE must weigh up signs of a slowing economy with the risk that robust pay growth and relatively low unemployment could sustain consumer spending and make inflation harder to quell.

However, the bigger issue now is the probable global growth slowdown resulting from tariffs on a wide range of imports into the US. Tariffs pour cold water on economic growth, making businesses delay investments and consumers more cautious with their spending. With this backdrop UK growth is likely to remain well below where the government wants it to be.

With clear risks to the economy there is a good chance the BoE will make a precautionary cut to interest rates in May, especially as other trends such as the lower oil price stand to reduce inflation pressures in the medium term.