UK unemployment rises and wages growth falls in recession

March 12, 2024

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UK unemployment rises and wages growth falls in recession

Employers observed to be cutting back on hiring new staff in three months to January as slowdown bites

In the three months leading up to January, unemployment increased and wage growth decelerated in the UK, indicating weakness in the labour market amidst a much broader economic slowdown.

According to the Office for National Statistics, the unemployment rate unexpectedly rose to 3.9% in January from 3.8% in December. Additionally, annual average wage growth, including bonuses, declined to 5.6% from 5.8% in the previous month.

City economists had anticipated unemployment to remain steady and projected a more modest decrease in pay growth to 5.7%. Pay excluding bonuses also saw a slight decline, dropping to 6.1% from 6.2% over the same three-month period.

Employers scaled back hiring efforts, resulting in a decrease of 43,000 advertised vacancies to 908,000 over the quarter. This suggests that the recession experienced in the latter half of 2023 had a slightly greater impact on the labour market than initially estimated.

The Bank of England has been monitoring signs of slowing wage growth before considering a reduction in interest rates. The latest figures are likely to reinforce the bank's inclination to initiate this process within the year.

However, recent surveys indicate that UK businesses are regaining confidence in the economic outlook and preparing to raise prices as employees continue to receive pay increases surpassing the headline inflation rate, which currently stands at 4%—double the Bank of England's 2% target.

Furthermore, an increase in the number of people exiting the labour market, mainly due to ill-health, is expected to contribute to difficulties for employers in finding staff, resulting in a gradual decline in wage growth over the coming months.

US inflation edges up ahead of Federal Reserve decision

In February, the inflation rate in the US accelerated due to increases in petrol and housing prices, according to the Labor Department. 

The annual rate, indicating the pace of price hikes, reached 3.2%, up from 3.1% in January. Items such as airfare, car insurance, and clothing contributed to this rise, while grocery prices, which have been a source of public discontent, remained unchanged.

This monthly report arrives amidst a crucial presidential election year and ongoing deliberations within the Federal Reserve regarding strategies to curb inflation. Since the Fed initiated significant increases in borrowing costs in 2022, inflation has notably slowed down. 

However, the expectation now is for the Fed to reverse its course and cut interest rates sometime this year. Initial suggestions for a rate cut in March have been revised due to recent inflation data showing stalled progress, with many anticipating the first move in June or later.

Analysts note that seasonal price adjustments tied to the start of the year influenced the figures, yet overall, the report is likely to affirm the Fed's cautious approach. The report highlights a 3.8% increase in petrol prices and a 3.6% rise in airline fares between January and February. Although grocery prices remained relatively stable during the month, they have risen by 1% compared to February 2023.

Housing costs, which increased by 0.4% month-over-month and 5.7% year-over-year, significantly impact US inflation calculations, constituting roughly one-third of the consumer price index.

Excluding housing costs, the inflation rate in the US is considerably lower than the official rate, with prices up by approximately 1.8% compared to February 2023.

Japan avoids technical recession as economic growth figures revised

Japan has managed to steer clear of a technical recession following the revision of its official economic growth data. 

The revised figures indicate that the gross domestic product (GDP) was 0.4% higher in the final quarter of 2023 compared to the same period a year earlier.

Earlier provisional data released last month had suggested two consecutive quarters of economic contraction, which typically defines a technical recession. However, the revised figures, while averting this scenario, fell short of expectations. 

Some economists had anticipated a more significant upward revision of around 1% for the fourth quarter GDP.

Hopes of recession avoidance were initially boosted by last week's Ministry of Finance data showing a notable increase in business investments. However, Monday's data from Japan's Cabinet Office revealed a 0.3% decline in private consumption, which constitutes approximately 60% of the economy, for the same period.

Japan's economic performance remains uneven, with prospects of another contraction in the current quarter due to various factors such as the slowdown in neighbouring China's economy and production suspensions at car manufacturer Daihatsu.

The upward revision in fourth-quarter GDP comes amid growing expectations that the Bank of Japan could soon raise interest rates. Since cutting borrowing costs below zero in 2016 to stimulate spending and investment, the central bank has maintained rates at -0.1%.

Negative rates have made the yen less appealing to global investors, leading to a depreciation in the currency's value.

Reflecting these economic dynamics, Japan's main stock market index, the Nikkei 225, saw a decline of around 2.5% on Monday morning.

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