UK labour market remains tight but real regular wage growth negative

Emily Nicol

UK labour market tightened further, but real regular wage growth remained firmly in negative territory
This morning’s UK labour market report extended recent trends, suggesting increasing tightness even as pay struggles to keep up with rising prices. Despite some softer GDP growth in February, the unemployment rate fell 0.1ppt in the three months to February to 3.8%, the lowest since the end of 2019. But while the number of full-time employees continued to rise and there was the first increase in self-employment in seven months (albeit still remaining some 800k lower than before the pandemic), the number of people in employment rose just 10k in the three months to February, with the more timely payroll numbers reporting the softest monthly increase in March (35k) for more than a year. Indeed, there was a further increase in inactivity in February, with the respective rate now 1.2ppt above that before the pandemic due not least to increased long-term sickness. But while the pace of increase slowed again, the number of job vacancies rose to a new record high, to 1.288mn, with record levels in half the sectors. So, the ratio of unemployed workers to vacancies – a key measure of labour market tightness – hit a new record low.

Meanwhile, average total pay (including bonuses) rose 0.4ppt to 5.4%3M/Y in February largely thanks to higher bonuses. However, it was only up a minimal 0.4%3M/Y in real terms. And in contrast, while growth in regular pay (i.e. excluding bonuses) edged up 0.2ppt to 4.0%3M/Y – back close to the top end of the range between the global financial crisis and the pandemic – it was down a marked 1.0%3M/Y in real terms. And with inflation set to accelerate markedly further over the near term – probably well above 8.0%Y/Y in April – real pay will fall sharply this year, with household real disposable incomes set to fall the most in more than four decades.

BRC retail sales survey points to a marked slowdown in spending
Against this backdrop, today’s BRC retail sales monitor offered a relatively bleak assessment for the retail sector at the end of the first quarter. Indeed, despite a significant boost from higher prices, total sales growth (in nominal terms) slowed sharply in March, down 3.6ppts to 3.1%Y/Y. And like-for-like sales fell 0.4%Y/Y, the most since last September and a drop that would be notably steeper if adjusted for price effects. With consumer confidence having weakened sharply and households’ expectations for their personal finances over the coming year at the lowest since the global financial crisis, we continue to expect much weaker spending on non-essential items over coming months.

Japanese PPI inflation boosted by weaker yen and stronger commodity prices
Today’s Japanese producer price inflation figures came in above expectations in March, with prices rising 0.8%M/M to leave the annual rate up 9.5%Y/Y, down just 0.2ppt from February’s near-40-year high. A strong contribution to this month’s increase came from higher prices for electricity, with the utility index rising 2.6%M/M to be almost 40% higher than a year ago. Prices for chemicals were also up 1.6%M/M (13.2%Y/Y) and nonferrous metals up 3.6%M/M (23.5%Y/Y), with imported prices of such items exacerbated by the weaker yen. Indeed, in yen terms, import prices were up by 3.3%M/M (33.4%Y/Y), compared with an equivalent increase on a contract currency basis of just 1.0%M/M (25.2%Y/Y). As such, producer raw material prices were up by more than 2½%M/M, 50.0%Y/Y. But there was still limited evidence of these higher input burdens being passed significantly along the supply chain to consumers. Indeed, final producer consumer goods prices were up 0.7%M/M in March to leave the annual rate at 4.0%Y//Y, a six-month low and 1ppt lower than November’s peak.

German and French surveys to illustrate recent hit to sentiment
Turning to the euro area, today will bring several surveys from the largest two member states. Germany’s ZEW is likely to echo the further significant deterioration seen in last week’s sentix survey, with German investors likely to be much more downbeat about current conditions in April than in March, but also more pessimistic about the outlook for the coming six months. The Bank of France’s business survey for March might well signal a less severe impact on conditions than in Germany, with increased demand in tourism and recreation following the lifting of restrictions likely to offset to some extent the impacts from the Ukraine conflict. Based on this survey, the BoF will update its forecast for GDP growth in Q1, which it had previously estimated at around ½%Q/Q.

All eyes on US CPI figures
Of course, the key data highlight today will be US CPI inflation numbers for March. Energy prices accelerated last month and food prices remained under upwards pressure. So Daiwa America’s Mike Moran expects consumer prices to have risen 1.0%M/M, a touch below the Bloomberg consensus, but still the highest monthly increase since 2008. If Mike’s right, the annual inflation rate will jump to 8.3%Y/Y, the highest for more than four decades. And against the backdrop of strong demand, rising residential rents and supply-side disruptions, this release is likely to confirm a further widening of price pressures – indeed, core prices are forecast to have risen 0.5%M/M, to be a little more than 6½% higher than a year earlier. 

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