Rob Morgan, Chief Investment Analyst at Charles Stanley, part of Raymond James Wealth Management, comments following the announcement of UK labour market results.
UK jobs market: Household income squeeze lies ahead
“There can be little doubt now that there’s some worrying underlying trends within the jobs market as employers take a more cautious stance. The number of payrolled employees has fallen for three straight months, with a 100,000 drop in April alone. Vacancies also dropped to their lowest level in nearly five years, reinforcing the sense that demand for labour is cooling.
“Meanwhile, the headline unemployment rate ticked up to 5%, having previously dropped from 5.2% to 4.9% thanks to a rise in economic inactivity.
Impact of Middle East conflict
“The recent escalation in the Middle East has injected significant volatility into markets, disrupting oil and energy prices, transport routes and global supply chains. These developments are weighing on business and consumer confidence for the months ahead, with knock-on effects for hiring and employment.
“For many in work, conditions are also becoming more challenging. A renewed cost-of-living squeeze is building just as wage growth is slowing. Average pay growth has eased to 3.5% not including bonuses, the weakest since the pandemic. At the same time, inflation is set to pick up, possibly to as much as 4% as the year progresses, spelling a period in which pay increases lag price rises.
What it means for households
“Rising costs are set to intensify the wage squeeze, compounding the impact of a higher overall tax burden. As the year progresses, households face a trio of unwelcome pressures, with energy, mortgage and food costs all set to stretch budgets.
“Energy bills are likely to rise in July when the new Ofgem price cap takes effect, while higher fuel prices effectively already act as an additional tax that quietly erodes living standards.
“Yet the larger risk could arise from food prices. Higher transport costs and rising fertiliser prices, which are linked to gas markets, are set to feed through to supermarket shelves. These so-called “second-round” effects often occur with a lag but tend to be where inflation is felt most acutely, as everyday essentials become more expensive.
“Under normal circumstances, an economy stuck in a low gear would push the Bank of England (BoE) towards cutting interest rates to support activity. Instead, policymakers are likely to keep rates on hold while they assess how higher energy prices feed through into headline and core inflation. This means mortgage costs could remain elevated for those on variable rates or coming up for remortgage compared with just a month or two ago.
What it means for the economy
“A subdued labour market was signalling growing employer caution even before the situation in the Middle East flared up. Higher taxes and an expanding regulatory burden have been weighing on business confidence, making firms more hesitant to hire or replace staff.
“The surge in energy and fuel prices now threatens to amplify those headwinds. Higher input costs are likely to curb investment and undermine growth, further darkening the outlook for employment. It’s something the Chancellor is clearly aware of and responding to directly by scrapping an increase in fuel duty set to take effect in September.
“Compounding the challenge, the usual shock absorber of looser monetary policy is absent. With interest rate cuts now on pause, the economy has fewer buffers against external shocks.
What it means for interest rates
“Prior to the latest surge in energy prices, weaker labour market data had increased the likelihood of interest rate cuts. Jobs and wage growth are key metrics for the BoE, and cooling pay pressures in particular would normally open the door to easing.
“That prospect has now been quickly extinguished. Higher energy prices are likely to keep inflation over 3% for an extended period, rather than drifting back towards the 2% target as previously hoped. Even if geopolitical tensions ease, damage to energy supply chains means elevated costs will continue to filter through to the wider economy.
“The BoE is therefore stuck between a rock and a hard place. Growth is sluggish and the labour market is slack, yet a renewed inflationary pulse is set to hit households and businesses. The risk is that the UK ends up with the worst of both worlds: above-target inflation and a stagnant economy with few remaining policy levers available to counter it.”
