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Economists are not convinced that the UK’s labour market is a healthy one. Thomas Pugh, chief economist at the audit and tax firm RSM, notes that the drop in the unemployment rate was mostly driven by people dropping out of the labour force.
Indeed, employment only rose by 24,000 in the three months to February, well below population growth. What’s more, the number of people on payrolls contracted slightly in February. Private sector pay growth ex-bonus also slowed slightly from 3.3% to 3.2%. All this suggests that despite the fall in the headline unemployment rate, the labour market remained weak going into the energy crisis.
The provisional data for March suggests the labour market weakened last month. Payrolls dropped by 11,000 and the number of vacancies fell again. The risk is that rising energy prices prompt a big pull back in consumer demand while simultaneously pushing up input costs for businesses, which would push the unemployment rate even higher. We now think the unemployment rate will probably peak at around 5.5%. If energy prices rise higher over the summer as supply becomes even more constricted, the unemployment rate could move towards 6%.
While unemployment has seen a surprise fall to 4.9%, the expectation is that it will rise this year as business uncertainty caused by the Iran War overshadows the UK economy.
With the cost of employment also high, and expected to rise as the Employment Rights Act comes into effect, our latest forecast expects unemployment to hit 5.5% this year. The slow-down in wage growth indicates businesses are taking their foot off the gas and the labour market will continue to loosen.
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