The UK labour market report released today was more or less in line with expectations . Average weekly earnings excluding bonuses (3M) increased slightly to 2.9% y/y in July (Danske Bank estimate 2.9%, consensus 2.9%) from 2.8% y/y in June. Total wage growth is at the highest level since January 2009 - wage growth in the private sector was 3.4% y/y, the highest since August 2008.
The combination of increasing wage growth and 'noflation' implies increasing real wage growth, which supports private consumption and, thus, growth in the UK.
The unemployment rate (3M) in July declined back to 5.5% from 5.6% in June (Danske Bank estimate 5.6%, consensus 5.6%) as the single month rate declined to 5.4% from 5.5%. Actually, the number of unemployed persons increased by 10,000 in the past three months as the labour force increased more than employment (52,000 and 42,000, respectively), i.e. the decline in the unemployment rate was due to a higher labour force.
The labour market report suggests that the slack in the labour market continues to diminish and that the slowdown in the labour market in Q2 was only temporary. The unemployment rate is more or less back to 'normal' as the Bank of England (BoE) estimates that the medium-term equilibrium unemployment rate is around 5.5%. The fact that the labour market is tightening is also evident from the increasing wage growth. In our view, the economic upturn in the UK remains on track and thus we expect the unemployment rate to decline further , albeit most likely at a slower pace than in 2013 and 2014, see also Research UK: Economic upturn on track - inflation to pick up next year , 4 September. As unemployment crawls below the NAIRU, we expect wage growth to pick up further.
The BoE's focus has shifted to inflation in the wake of the lower oil price and the stronger GBP. We think the BoE wants to see CPI inflation stabilise/move higher before hiking and hence most MPC members are unlikely to feel comfortable with the near-term inflation outlook as the current 'noflation' is expected to continue in the coming months before inflation picks up early next year. This said, today's release supports the view that the case for a hike is building as unemployment is around NAIRU, wage growth remains solid and the BoE no longer considers the labour market a major concern . We still expect BoE to hike in Q1 16, probably February.
In our view, 'noflation' will weigh on the GBP near term . We forecast EUR/GBP at 0.73 in 1M. As inflation bottoms out and a BoE rate hike moves closer, we expect EUR/GBP to trade gradually lower in the medium term and expect EUR/GBP at 0.70 in 6M. Fiscal consolidation and political risks in the UK (EU referendum) are likely to weigh increasingly on the GBP next year. We expect EUR/GBP to bounce back toward 0.72 in 12M. For more details, see FX Forecast Update: It ain't over till the Fed sings , 16 September.
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