Jobs data points to an interest rate rise

Laith Khalaf, Head of Investment Analysis, AJ Bell

Laith Khalaf, head of investment analysis at AJ Bell, comments on the latest labour market statistics from the ONS:

“These latest figures from the ONS are the first snapshot of life in the labour market after the furlough scheme. It’s still early days, but the employment market looks to be in rude health. The unemployment rate dropped to 4,2%, a smidge above its pre-pandemic level, but still low by historical standards, which speaks to the speed of the economic recovery we’ve witnessed. The number of payrolled employees rose to 29.4 million, almost half a million higher than its February 2020 level.

“A particularly bright spot in the data was an improvement in the prospects for the young workers who have been worst hit by the pandemic. Over the last quarter the unemployment rate for 16-24 year olds has fallen to below pre-pandemic levels. The number of job vacancies on the rack is some cause for concern, hitting another record high in the latest quarter, which demonstrates businesses are still finding it difficult to recruit staff. However, the rate of growth in vacancies has slowed, and the latest monthly figures actually show a small decline, the first since February of this year.

“Meanwhile the high level of vacancies isn’t feeding through into higher wages across the economy as a whole. Wage growth continued to moderate, with regular pay growth falling to 4.3%, down from a peak of over 7% earlier this year. Taken together, these figures suggest that the labour market is beginning to stabilise, and heading back towards the Goldilocks level so cherished by economists. The porridge has been piping hot, but there are tentative signs it’s cooling.

“There are those who think the strength of the labour market is a worry when it comes to stoking inflation, and certainly there is little room for complacency on that front, especially when job vacancies are still eye-wateringly high. Part of the problem may be the labour market is just catching up with the rapid economic recovery, or there may well be frictional dislocations, as the jobs required by the post pandemic economy are different in type and location compared to those in demand before. The jury is really out on whether the strength of the labour market is cause for inflationary concern, because we are still at a relatively early stage of emerging from the depths of the pandemic.

“However a strong jobs market clearly makes the case for a rise in interest rates from historic lows. The Bank of England has been quite sensibly waiting for data which is not heavily distorted by the furlough scheme, and that is now beginning to emerge. The Bank will likely want to see a bit more sustained stability in the labour market post furlough, and to assess the damage wrought by the Omicron variant. That makes a Christmas rate hike unlikely, but barring severe social restrictions pegging the economy back, the Bank will probably begin to tighten policy in February.”

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