Further evidence of a loosening of UK labour market conditions, but private sector wage growth momentum still way too high for the BoE’s comfort
Consistent with recent surveys, this morning’s UK labour market data suggested a further loosening of UK labour market conditions. But with momentum in private sector pay still far too string to be compatible with achievement of the inflation target over the medium term, the figures are probably nevertheless consistent with a further rate hike from the BoE next month.
Within the detail pointing to a softening of the labour market, the number of payrolled employees fell (-136k) in April for the first time since February 2021. While these figures are often significantly revised, we note that the direction of revision is usually down, perhaps underscoring the weakness of this latest reading. And while employment on the ILO measure rose in the three months to March (+182k), this once again reflected as pickup in part-time and self-employed positions, with the number of full-time workers declining on the quarter.
Encouragingly for the BoE, the economic inactivity rate – whose rise throughout the pandemic has been a notable structural weakness for the UK economy – fell 0.4ppt on the quarter in Q1. Admittedly, that fall in inactivity was largely driven by young people, while the number inactive due to long-term sickness rose again to a new record high. But with higher participation overall, however, the unemployment rate edged up 0.1ppt in Q1 to 3.9%. And the number of vacancies fell for the tenth consecutive period in the three months to April, by 55k or almost 5% to the lowest level since August 2021, to push the ratio of jobless workers-to-vacancies up 0.1ppt to 1.2. But while total vacancies were down 214k from a year earlier, they were still 282k above the pre-pandemic level.
Less encouraging for the BoE, underlying pay growth failed to show convincing further signs of significant cooling. While average total pay (including bonuses) was down 0.2ppt on the quarter at 5.8%3M/Y in the three months to March, growth in regular pay (excluding bonuses) was unchanged on the quarter at 6.7%3M/Y. Admittedly, in the private sector, total pay growth was down 0.6ppt on the quarter at 5.9%3M/Y, with regular pay growth down 0.3ppt at 7.0%3M/Y. In contrast, regular pay growth in the public sector leapt 1.3ppts to 5.6%3M/Y, the strongest in almost two decades.
However, looking at the most recent momentum, private sector total pay rose 0.2ppt on the quarter to 1.6%3M/3M. And the further cooling of private regular pay on the same basis, down 0.2ppt on the quarter to 1.5%3M/3M (i.e. about 6% on an annualised basis), left momentum far too strong (and perhaps as much as double the required rate) to be compatible with achievement of the inflation target over the medium term. Of course, given higher inflation, in real terms, growth in total and regular pay was exceptionally weak, at -3.0%3M/Y for total pay and -2.0%3M/Y for regular pay, and so consistent with still-soft household spending momentum.
China’s activity data point to a more subdued recovery than expected at start of Q2
According to today’s activity numbers, China’s post-Covid lockdown recovery continues to lag behind hopes and expectations. Admittedly, retail sales growth jumped almost 8ppts to 18.4%Y/Y in April, the strongest pace for more than two years, with catering and jewellery sales up around 44%Y/Y and clothing sales up around 33%Y/Y. But growth in total sales was slightly softer than the Bloomberg survey forecast and was flattered by a double-digit decline a year ago associated with Shanghai’s lockdowns a year earlier.
While industrial production growth picked up to 5.6%Y/Y from 3.9%Y/Y in March, this again fell short of expectations, with the annual growth roughly half the Bloomberg survey forecast and production down 0.5%M/M. This left production up 3.6%YTD/Y, merely matching the growth rate in December. Manufacturing output rose a slightly firmer 6.5%Y/Y in April, but output was still up just 3.9%YTD/Y. Perhaps unsurprisingly, there was a stronger rebound in services output, up more than 4%M/M and 13½%Y/Y, with significant growth in hospitality (48.7%Y/Y) and wholesale and retail (18.8%Y/Y).
Growth in fixed asset investment slowed to 4.7%YTD/Y in April, from growth of 5.1% in the first quarter. Private-sector investment remained extremely subdued, easing to just 0.4%YTD/Y, the softest such growth since late-2020. And while residential property sales rose in April, with growth of 11.8%YTD/Y the strongest since October 2021, investment in real estate continued to decline (-6.2%YTD/Y) for the thirteenth consecutive month.
Euro area Q1 GDP growth might well be revised away amid slump in IP
In the euro area, today will bring updated Q1 GDP figures. Given the larger-than-expected slump in industrial production in March, there is a non-negligible risk that we will see the modest expansion in GDP (0.1%Q/Q) revised away. The latest goods trade figures for March (also due this morning) will offer some further insight into the contribution from net exports last quarter. Meanwhile, with economic activity subdued, the latest employment figures are also likely to report a moderation in growth in Q1 from 0.3%Q/Q in Q4. However, consistent with surveys, jobs growth will still remain in positive territory, underscoring the resilience of the labour market.
The latest German ZEW investor survey, which might well tally with last week’s Sentix survey reporting a further moderate deterioration in investor sentiment in May.
US retail sales & IP data likely to be consistent with subdued demand
In the US, as discussions on a possible debt ceiling agreement remain in focus, today will also bring the latest retail sales and industrial production data for April. Daiwa America’s economist Lawrence Werther forecasts an increase of 0.5%M/M driven by a pickup in auto sales and higher prices of gasoline. Indeed, excluding autos and gasoline, he expects sales to have risen just 0.1%M/M as consumers remained constrained by economic uncertainties. Meanwhile, industrial production is expected to posted only modest growth (at best), with some payback expected for the weather-assisted boost in demand for mining output in March.