The recent release of UK labour market data for April and May has raised alarms regarding the economic direction of the country. Analysts from ING, Ewa Manthey and Warren Patterson, highlighted the implications of this data, indicating that the Bank of England (BoE) must continue cutting interest rates to avoid falling behind in its monetary policy compared to the European Central Bank (ECB).
Indeed, the latest privates sector earnings figures reveal a staggering pay recession, with private sector earnings collapsing to -5.1% y/y. This drop is bigger than expected and due to base effects. Furthermore, the report presented a startling loss in payrolled employees, with an eye-popping net loss of 109k. This marks the most substantial monthly decline outside of the Covid-19 pandemic since the labour market data series began in 2014.
“On the face of it, it is a fairly dovish UK jobs report this morning. Wages are down more than expected – private sector at 5.1% YoY. These were due to come lower anyway as a result of base effects, but this is a bigger drop. More eye-catching is the sharp fall in payrolled employees at -109k. That would be the biggest monthly drop outside of the Covid-19 pandemic since the data series began in 2014.” – Ewa Manthey and Warren Patterson
In March, the first estimate for job losses came in at -78,000. However, this number has since been revised to -35,000, indicating that while there may be fluctuations in reported data, the underlying trends still present a concerning picture for the UK economy. As Manthey and Patterson recently noted, changes almost always lead to increases. They pointed out that the past few months represent a consistent, ongoing downward trend.
“But this data always gets revised, and more often than not, it is revised up. For example, in March, the initial reading was -78k, and it has since been revised to -35k. Still, there is clearly a more negative flavour to these numbers over the past few months, and it reinforces the need to keep cutting rates, else the Bank of England risks slipping behind the curve.” – Ewa Manthey and Warren Patterson
Even more so with the inclusion of other developments which makes Pound Sterling (GBP) vulnerable to weakening after the release of this data. The seed capital currency is fractionally softer today as investors still process the implications of a drop in wages and employment figures. One of those key insights is the EUR/GBP exchange rate. The level of 0.8445/60 has emerged as significant short-term resistance for this pair.
In reaction to that selling trend, EUR/GBP has triggered a relief rally of 20 pips to 0.8435. This campaign is part of a broader rejoicing about the Bank of England undercutting its European rivals. With the BoE being perceived as lagging behind the ECB in its easing cycle, analysts predict that the policy spread may narrow by 100-125 basis points against sterling over the next 12 to 18 months.
The current economic environment underscores the challenges faced by the Bank of England as it navigates its monetary policy amid shifting labour market dynamics. Analysts will watch these developments closely, especially as it affects the growth of wages and overall levels of employment.