Moreover, despite the UK economy performing extremely strongly—much stronger than expected in February—the cloud of uncertainty for the jobs market is still hanging. A string of negative employment surveys suggests the labor market will face increasing challenges in the months ahead. A recent $45B tax increase on employers was already causing their worst hiring intentions on record. The implications of this development will almost certainly be far-reaching. Spurring this trend will be the high cost of living combined with wage pressures.
In February, the UK economy registered a strong growth rate that shocked most economists. Manufacturing sectors played a pivotal role, contributing about half of the overall economic growth with a remarkable increase of 2.2% during the month. The retail sector has proven resilience to recession, coming in stronger than expected in 2023 so far. Reassuring as these numbers are, they’re released against a backdrop of increasing anxiety about the jobs market’s long-term viability.
Chief among those uncertainties is the effect of the latest National Living Wage increase – which went up by almost 7%. This increase is likely to put further upward pressure on total pay growth. While nominal wages are growing at 6%, inflation is still around 3%, making this a difficult time for employers and employees alike. With every new data point, the increasing cost of living is sure to rattle consumer confidence and spending. This presents both immediate and long-term obstacles to continued economic expansion.
The good sign in this data is that the broader jobs market is cooling down. Something analysts say it will probably at least into next year as companies adjust to higher costs and a challenging economy. The recent employer-side tax increase has given companies good reason to reconsider their hiring strategy. Many are now starting to scale back their hiring plans, too. Still, as businesses adjust to these pressures, the broader employment picture is a mixed bag.
Moreover, external factors beyond industry control, like tariffs, have an outsized impact on the economic environment. Tariffs are another concern for producers based in the UK. Yet, their net impact is muted by the fact that the UK has very low exposure to demand for US goods, apart from in key areas such as cars and pharmaceuticals. Tariffs are the most rapid and extreme factors affecting the US economic outlook. China’s retaliatory decision this week to increase tariffs on US imports put even more pressure on the US Dollar (USD).
It is unfortunate that monthly GDP figures have continued to sow confusion instead of clarity. As a result, it’s very hard, or even impossible, for analysts to extract the long-term trends out of the short-term performance. Nonetheless, the positive growth in February serves as an important indicator of resilience in the UK economy amid these uncertainties.
Going forward, departmental spending is already bound to rise by 4% in real terms year on year for the fiscal year that will begin in April 2024. This investment could go a long way toward creating the economic certainty and opportunity our nation needs to overcome these hurdles. To stay ahead of this dynamically changing job market, policymakers should pay careful attention. They’ll need to do so in a thoughtful, strategic way to avoid hampering progress and worsening any employment-wage growth.