Bloomberg on UK labor data and their bias on a hike in August
I read an article yesterday that made a case for a rate hike out of the UK by August this year. The article acknowledges the slowing economy in 4Q2018, but see continued demand for labor should Theresa my get her Brexit deal through by the end of this month. Their projections are for:
- Unemployment rate to stay at 4% (historically at very low level)
- Economy to add a further 125K jobs vs 167K prior. (the consensus they note as being 120K)
- Regular pay growth to remain at 3.4%
They referred to their indicator of 'real time employment' (BIRTE), slowing a little from the start of the year, but with underlying strength.
They cite three reasons for labor demand staying steady, when growth has been slowing. They are:
- Labor market has a tendency to lag movements in demand. They suggest jobs growth reflects acceleration in headline activity last summer
- They speculate that some companies may have continued to hire on the assumption that growth will accelerate this year as Brexit negotiations lift
- The strength of job gains may be a sign of the weakness of productivity growth as companies have put off purchasing efficiency-boosting technology to meet demand and instead hired extra staff. The logic being that staff can be fired and may be less expensive than new machinery or software
They note that the strength of the labour market would normally pose upside risks to the inflation outlook and should nudge the Monetary Policy Committee (MPC) towards taking the next step in normalising policy. However, they consider the MPC will want to see evidence that a rebound in growth is really happening before raising rates and that even an agreed Brexit deal would not result in rates being hiked. They refer to Bank of England's MPC member Silvana who said as much:
before voting for any rate rises I would want to be confident that demand was growing faster than supply'
They conclude by saying that ff growth does rebound in 2Q the MPC will probably have the evidence it needs to warrant an increase in rates by August. A fair assessment in my view and helpfully reminds that once Brexit has been finalised the economic data for the UK will come firmly back into view.
