UK: Solid headline employment data disguise deterioration – RBS

Ross Walker, UK Economics Desk Strategist at RBS, suggests that the UK’s deteriorating post-referendum outlook means that the market’s data focus will shift from trying to detect nascent price pressures towards signs of deteriorating activity.

Key Quotes

“The lagging nature of employment and the rolling 3-month averages for the headline data mean job growth will have remained superficially solid in Q2. Still, a few cracks are already visible with average working time falling and out-sized gains in self-employment (probably indicative of under-employment).

Average earnings: UK wage inflation rose to 2.3% 3m y/y in May from 2.0%. This was a 7-month ‘high’, but wage pressures remain very muted. The EU referendum shock – the uncertainties raised, in particular for the financial services sector, and the cost shock resulting from sterling’s depreciation – suggest a further squeeze on wage inflation over the next year or so as firms try to offset imported cost pressures. We forecast the ex-bonuses AWE rate to inch higher to 2.3% 3m y/y in June, with the headline rate remaining at 2.3% 3m y/y.

Employment: Total (ILO) employment rose by 176k, 0.6% q/q, in the three months to May. This was a superficially robust outturn but the detail of the data was less impressive.

We forecast employment to rise by 155k in the three months to June, lowering unemployment by 70k and leaving the unemployment rate at 4.9%. NB, this 3-month outturn would be consistent with a single-month fall in employment of 90k (a correction following the out-sized 231k rise in May). One of the complications around the June forecast is the judgement around how much of May’s implausible 231k increase reverses.

On the claimant count, we forecast a 6.0k rise in July, leaving the unemployment rate at 2.2%.”