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20 Mar 2024 | 5 minutes to read
UK labour market data has been a source of some confusion over recent months, but the mists appear to be lifting.
As far back as August, the Office for National Statistics began using experimental statistics to calculate the unemployment rate, given concerns around the accuracy of the official Labour Force Survey data as survey participation falls. This approach relied on claimant count data, and estimated that unemployment was now above 4%.
The timing of this change to the methodology was unfortunate, as it coincided with the labour market becoming a key factor in monetary policy decision making.
The Labour Force Survey for December and January was published, with renewed efforts to boost response rates and an increased sample size, coupled with updated estimates of the size and makeup of the population.
Relative to the experimental statistics, December and January data suggested that unemployment was somewhat lower at 3.8%. January and February data, released last week, seemed to confirm this, though unemployment appears to be on the rise. In the three months to January, unemployment edged higher to 3.9%, reflecting a 21,000 drop in employment according to the Labour Force Survey.
Given that the survey still faces participation challenges, can this data be trusted? Alternative data sources tell a somewhat similar story. Payroll data, reflecting employee jobs rather than workers, did increase by 20,000 in February, but this is a soft reading by recent standards, and January was revised down to a 15,000 increase.
Crucially for the Bank of England, wage growth is slowing. Headline pay growth slowed to 5.6% from 5.8% in January, while regular pay, excluding bonuses, slowed to 6.1% from 6.2%. Slowing wage growth is likely to reduce the upward pressure on services costs, which feed into inflation.
The combination of slowing wage growth and softer-than-expected inflation is likely to set the scene for rate cuts later this year. The 10% April increase in the minimum wage could halt progress on wage growth, but broader data suggests continued easing is likely.
We continue to look to the May Monetary Policy Report as a key staging post in the MPC’s journey in a more dovish direction.
While UK data has been relatively well behaved, from a Central Banker’s point of view, US data is still giving the Federal Reserve (Fed) a headache. February’s US inflation data showed a rise in inflation to 3.2% from 3.1%, with a month-on-month acceleration to 0.4% from 0.3%. Core inflation did decelerate to 3.8% from 3.9%, but month-on-month growth stayed at 0.4%.
Within the print, the strength came from a range of drivers. Core goods were stronger-than-expected, driven by apparel and used car prices. Owner Equivalent Rent moderated from the spike in January as expected but observed rent was slightly firmer. Airfare prices were very strong, but this component does not feed into the Personal Consumption Expenditure calculation, a key metric for the Fed.
While CPI is expected to continue to decline this year, the easy wins are clearly in the rear-view mirror. Coupled with the fact that the labour market has been more resilient than expected, this makes the case for the Fed delaying rate cuts to the second half of the year. This view has been taken on board by the market, with futures prices now indicating the first cut is expected in July.
As the dust settles after China’s National People’s Congress (NPC), policymakers have announced new measures to make regulation more “investor orientated” and to encourage China’s stock market to mature.
China’s Securities Regulatory Commission published four documents outlining the approach. This includes stricter quality limits on which companies can list; a shareholder-friendly regulatory approach; encouraging counter-cyclical use of buy-backs, dividend issuance, and building internationally competitive leading companies by 2035.
These announcements come at a time when China’s stock market has been under pressure, exacerbated by weak growth in China and a lack of sizable stimulus to boost activity. While the NPC set the 2024 GDP growth target at 5%, this looks ambitious with the current policy package. While the government budget will expand this year, local government spending will remain constrained. Given that the property market is still weak, this removes a key source of revenue for local governments and, without expanding local government budgets, it is hard to envision a significant acceleration in infrastructure spending. The weakness of the property market, without further support, may be way more meaningful on growth, risking GDP growth as low as 3% this year.
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