Falling unemployment and solid wage growth bring consumer cheer - J.P. Morgan Asset Management
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Falling unemployment and solid wage growth bring consumer cheer

Contributors Michael J. Bell, Global Markets Insights Strategy Team
Unemployment continues to fall

The UK labour market continued to show signs of improvement according to the latest employment report released today. The unemployment rate fell to 5.3% in the three months to September, down from 5.4% in three months to August. The number of people in employment increased by 177,000 in the third quarter and has increased by 419,000 over the last year. The number of people between 16 and 64 who are not working or seeking work declined by 22,000 over the quarter, and by 62,000 over the year, to 8.97 million (or 22%)—which is the lowest level since 1991.

Record UK employment

 

Source: Office for National Statistics (ONS). Data as of 11 November 2015.

Real wage growth remains positive

As the labour market continued to tighten wage growth remained solid, with average weekly earnings including bonuses increasing 3% year on year (y/y) to £492. This works out as equivalent to an average annual pay rise of £745 per worker. With consumer price inflation at -0.1% y/y, the UK consumer is enjoying strong real wage growth. Clearly inflation should pick up once the drop in the oil price falls out of the year-on-year comparison, but even core inflation (which excludes food and energy prices) is currently only rising by 1% y/y. Real wage growth therefore looks sustainable. Despite a small 3.3k increase in jobless claims, the claimant count rate remained steady and low at 2.3%.

Investment implications

Having strengthened ahead of the employment data, the pound initially fell straight after the report was released, before rallying again soon after. The UK equity market has remained up since opening. The Bank of England’s (BoE’s) inflation report had earlier reduced the central bank’s forecast for inflation at the end of 2016 relative to its expectations in August. The BoE appears more dovish than might be expected given the continued robust performance of the UK labour market. It has noted the risks to global growth and the inflation outlook from the weakness in emerging markets. With unemployment and inflation low, wage growth rising and the BoE cautious on raising interest rates (and also making it clear that when rates do finally start to rise they are likely to rise slowly), the outlook for the UK consumer and domestic economy is positive heading into the Christmas period and the New Year.

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