Written by 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.
Official ONS numbers are not yet reflective of this emerging trend with the official unemployment count holding steady at 4.4%. Still low by historic standards but the data, which needs to be taken with caution owing to collection issues, is not yet picking up what seems to be being expressed in industry surveys.
Meanwhile the official measure of wage inflation continues to barely blink at 5.9%. This indicates there is still demand for workers and perhaps reflects the difficulty and cost to secure necessary skills if they are lost.
To what extent the picture changes once increases to employers’ costs takes effect in April remains to be seen. Some businesses will err towards passing on the higher costs through price increases rather than reducing headcount. 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 price rises.
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.
As the picture is mixed it seems likely the bank will press the pause button on rate reductions later today. It will only have to wait a little longer to see evidence of what permutation of higher prices, fewer jobs and reduced profits the economy is left with following the hike to national insurance costs that employers will endure from April.
It will also be mindful that the Chancellor’s Spring Statement is just days away and any fiscal alterations can be fully digested by the next meeting in May.
By then the full geopolitical picture should also be taking shape more clearly too. With President Trump looking to implement more tariffs there is the potential for global inflationary pressures to build rapidly – even if the UK escapes much of the proximate trade war damage.
