Mixed labour market indicators provide a confusing picture for Britain. Can its recovery remain on track when real wages are on the decline? Lower unemployment suggests that higher wage demands could be on the horizon, but for the now it gives the Bank of England some breathing room to keep rates at 0.5 per cent when it meets in July.
The UK unemployment rate fell to 6.6 per cent in the three months to April, from 6.8 per cent in the October quarter, and is now at its lowest level since December 2008. This figure beat market expectations for a more modest decline.
More importantly, and unlike other Western countries such as the United States, the unemployment rate has not been driven down by a decline in the participation rate. So far the participation rate is actually placing a little upward pressure on the unemployment rate.
Britain faces many of the same demographic issues as Australia and the United States -- namely an ageing population -- but so far this has been offset by discouraged workers re-entering the workforce and reinvigorating the economy. In time this will begin to reverse but there is no immediate sign that retiring ‘baby boomers’ are weighing significantly on growth.
UK employment rose by 345,000 over the past three months, led by the private sector. Government payrolls declined by 103,000, but that is a little misleading as much of it was due to a reclassification of Lloyds Bank from the public to the private sector. After adjusting for this, the public sector shed 11,000 jobs.
While there was good news on the employment front, wages remain a concern for the BoE. Annual wage growth -- excluding bonuses -- slowed to 0.9 per cent in the three months to April. Wages have actually declined by 0.2 per cent since January. Growth has been fairly similar between the private and public sectors.
With Britain’s annual inflation currently tracking at around 1.8 per cent -- towards the top of the BoE’s upper target -- real weekly earnings have shifted into negative territory.
Nevertheless, the British economy continues to grow at a strong pace, rising by 0.8 per cent in the March quarter, and all indications suggest that the June quarter has been fairly solid thus far. The National Institute of Economic and Social Research said that the British economy rose by 0.9 per cent in the three months to May, suggesting it will finally exceed its pre-crisis high when the June quarter national accounts are released.
But strong growth and negative real wages are rarely compatible for long unless a country’s export industry booms. Certainly the latter is not the case, with a high pound weighing on exports.
This all points to poor productivity growth, which will inevitably weigh on household spending and business investment. The BoE will be keeping a close eye on wages and, combined with an elevated pound, that should keep inflation in check and allow them to leave rates unchanged as they have since March 2009.
A decline in unemployment is always welcome news -- particularly when it reflects stronger participation -- but the British economy itself remains fairly mixed despite the strong headline data. Falling unemployment will help to support consumption growth over the near term but without a boost to productivity it remains a short-term source of growth.