Here in the UK, the labour market is coming down to earth with a bang. This economic downturn is doing a number on economic sentiment right as we enter Non-Farm Payroll (NFP) week. This report will be very important for setting the tone on risk sentiment for all of the fourth quarter. It arrives at a key moment as the Bank of England (BOE) comes under increasing pressure to raise interest rates. Analysts have made that now nearly a 90% probability, BOE cuts next week.
With the NFP report nearing, US stock markets showed signs of uncertainty on Monday, giving up significant early advances to close in the red. This trend is a sign of the increasing concern by investors about possible economic damage, which all points to the currently expected negative impact from Friday’s employment data.
Current Labour Market Dynamics
New analysis from the TUC provides a damning picture of where the UK labour market is heading. Unemployment is up, with the rate climbing to 5.1%, its highest since 2021. This major increase comes just as employment in the region has begun to decline. In October, we lost 22,000 jobs, with another loss of 38,000 jobs in November. The increase in unemployment has been much more steep for men than women during this crisis—pointing to a wider gender gap in job loss.
The share of the unemployed who are out of work for six months or more is increasing. This trend is an unfortunate harbinger of an increasing challenge to our labor market. The economic inactivity rate is still decreasing out of every other demographic group. It decreased from 22% in 2024 to 21% this year, a sign of slight decline which continues into the third quarter. Even with this positive development, the national employment picture continues to be riddled with challenges.
Sectoral Insights and Wage Growth
Looking at trends by major sectors gives us a better picture of the state of the labour market. The health care sector and transportation sector have both had extraordinary payroll expansion over the last year. This trend is encouraging news, despite the wider swath of industry suffering deeper downturns. The retail sector has suffered the steepest decline in payrolled employees. That’s a clear sign that industries with direct contact to consumers are under extreme duress.
Meantime, both public and private sector wage growth have fallen back under the 4% threshold. It currently is at only 3.9% YoY, the lowest since 2020. Public sector wages in nearly every state are increasing at a much faster rate than the private sector. This trend reflects the persistent inequities between the two sectors. Average hourly earnings growth has downshifted to 4.7%, down from 4.9% in September. This plunge indicates that the pace of wage growth is leveling off, in spite of ongoing inflationary pressures.
Implications of Inflation and Economic Sentiment
As UK inflation also reached a new high in September, fears over the cost of living and economic-security have only grown. Soaring inflation rates and great stagnation in wage growth are sure to rob consumers of spending power. Together this reality provides an even cloudier economic picture. This is the trend analysts will be watching closely as they gear up for the next NFP report.
The NFP report’s impact on risk sentiment should not be underestimated. Investors are acutely aware that it could decide the direction of the market for the rest of the year. A second consecutive disappointing employment figure would likely spark fresh calls for a BOE rate cut. This scenario could further elicit fears of a coming economic downturn.