UK unemployment rate improves but wage growth slows further

Unemployment levels in the UK fell to the lowest rate since the summer of 1975, but wage growth continued to slow and reinforce the sharp squeeze on consumers coming from rising inflation.

The UK ILO unemployment rate for the three months January slipped to 4.7% from 4.8% a month ago, the Office for National Statistics revealed, while the consensus estimate was for it to remain the same.

Employment improved by 92,000 in the three month period, above the consensus for a 87,000 rise and outpacing the increase in the labour force, with unemployment dipping 31,000 alongside a pick-up in vacancies.

But the 'wageless recovery' continued, with average weekly earnings growth contracting to 2.2% for the three months to January, down from the 2.6% in December and lower than the 2.4% consensus.

Excluding bonuses, the rate fell to 2.3% from 2.6%, with the forecast having pointed to 2.5%,

A more timely measure of unemployment, the claimant count rate for February improved to 2.1% from the revised previous 2.2%, with a jobless claims fall in February of 11,300 after the revised previous decline of 41,400 in January.

With average earnings growth not picking up alongside inflation, this is resulting in a sharp squeeze on real wage growth.

Along with the recent rise in CPI inflation, this means that annual real wage growth of 0.8% was the weakest since the three months to November 2014, said Scott Bowman at Capital Economics .

"Nonetheless, we think that the current tightness of the labour market will result in a rise in nominal average earnings growth over the coming months," he said, pointing to the fall in the unemployment rate due to the 92,000 rise in employment.

"The three-month rise in employment meant that the annual growth rate held steady at 1% and surveys of firms’ employment intentions suggest that this rate will be maintained in the next few months. Accordingly, we think that real wages should avoid significant falls this year and this will prevent consumer spending growth from slowing too much."

IHS Markit economist Howard Archer said the improvement in the labour market was helped by a lull in the labour market last autumn and as year-on-year growth in unemployment had slowed overall since mid-2016.

"The labour market has been helped by the economy’s extended resilience since June’s Brexit vote, but mounting signs that consumers are starting to limit their spending fuels belief that 2017 will become increasingly difficult for the economy and for the jobs market," he said.

"Deteriorating consumer purchasing power and likely increasing business uncertainties and caution over Brexit are expected to take a toll on growth and employment. The imminent triggering of Article 50 will bring likely difficult negotiations with the EU come increasingly to the fore."

Consequently, Archer sees unemployment starting to edge up before too long and he suspects unemployment could reach 5.1% by the end of 2017 and 5.6% by the end of 2018.

He said the earnings growth and the pick-up in inflation was "really squeezing consumers hard" and predicted inflation will move above earnings growth during 2017.

This would weigh down on consumer spending and hence have a circular effect on employment and wage growth.