UK Employment Might Be the Catalyst Needed for the BOE
The UK is expected to get another bit of good economic news. But upbeat forecasts make it easier for a disappointment to appear and drag on the market. After a string of positive results that have failed to energize the pound over the last few trading days, investors might be hoping for some upside in cable from the jobs numbers to be released tomorrow.
One of the issues plaguing the pound is the seeming reluctance of the BOE to take a stronger position to bring down inflation. Other central banks have been hiking at 50 and even 75 bps at a time, while the BOE has been plodding along. The division in the vote is also weighing on confidence. Both the Fed and the ECB have managed clear, unanimous votes for their policies. If the vote division were to be resolved – or there was data to indicate a resolution was nearing – then investors might have more confidence in the BOE bringing inflation down.
Getting the house in order
The two dissenters have stressed that it’s more important to boost the economy than to fight inflation. The latest GDP numbers might have done something to assuage those worries, since the UK managed to avoid a recession. Sure, 0.1% quarterly growth isn’t much to celebrate, and the IMF still hasn’t changed their forecast that the UK will be the only major country to post negative growth this year.
On the other hand, the government cut spending by 2.5% last quarter, and the economy still managed to stay in the green. That’s significant because government spending represents 45% of the country’s GDP. Which implies the UK private sector managed over 1.1% quarterly growth.
The jobs situation
That supports the positive labor situation, which will be reported next week. Private businesses are still hiring, and are expected to keep the unemployment rate at 3.8%. That’s below what is seen as the structural level, which has the negative aspect of pressuring wages.
What the BOE is most interested in is the average earnings since that can translate into inflationary pressure. There the earnings are expected to decelerate a little to 5.7% compared to 5.9% prior. This is significantly below inflation levels, meaning that UK workers are seeing their purchasing power erode over time. Not good for the long-term projections of the economy. On the other hand, it means there is little risk of a wage-price spiral, which would make raising rates more urgent.
The good news
The consensus is that the claimant count will be a negative 15.0K compared to an increase of 28.2 in the prior reading. Remember that the lower this figure is, the better it is for the economy, because it represents the number of people seeking unemployment benefits.Labor tightness implies that there is dynamism in the private economy. The problem is that the government is being forced to spend less as it has to make more payments in interest as the BOE hikes rates to bring down inflation. That slowing public growth weighs on GDP, making it difficult for the BOE to keep hiking without causing secondary effects. If the labor market continues to show resilience, however, it might finally convince the dissenters that bringing inflation down is possible without hurting the economy too much.