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Sunak’s relief over rising UK employment may be short-lived

Rishi Sunak is too savvy an operator to declare victory in the battle against unemployment because the past 18 months have shown that the unexpected can happen, and often does.

Yet while noting that there could still be “bumps in the road”, the chancellor is certainly relieved by how well the UK labour market has recovered from the effects of the Covid pandemic.

The latest jobs bulletin from the Office for National Statistics showed the employment rate up and the unemployment rate down. Job vacancies hit 1m for the first time in July and the number of hours worked a week – while still below their pre-crisis levels – passed 1bn for the first time since early 2020. Without question, this was an extremely strong report.

Three big imponderables remain. The first is whether the labour market will be knocked off course by the large number of daily cases of the Delta variant of the virus being reported in recent weeks. Thus far, the boost to employment from reopening the economy after its winter lockdown has outweighed any headwinds from the “pingdemic” or consumers becoming more nervous due to fears of falling ill.

The second issue looming is whether unemployment will start rising now the furlough scheme is being phased out. Wage subsidies have been – along with the development of vaccines – one of the two main success stories of the past 18 months and the TUC says it is premature to bring them to an end next month.

Sunak thinks the furlough scheme can be phased out relatively painlessly because half the people still on the scheme are on flexi-furlough, working some hours in their old jobs.

The ONS said there was no evidence of redundancies increasing before employers having to make a contribution to the costs of the furlough in July, which supports the chancellor’s view that firms are less likely to make people redundant if they are paying a share of their wages.

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Even so, the continued problems of certain sectors and the structural changes to the economy since the start of 2020 – more working from home and an increase in online shopping, for example – mean some dislocation is inevitable.

Finally, there is the question of what the Bank of England does in response to a labour market in which there appears to be little spare capacity. In the three months to June, annual growth in average earnings reached 8.8%, up from 7.4% in the three months to May and the highest since the current series began 20 years ago.

On the face of it, there is a case for immediate action from Threadneedle Street to prevent a wage-price spiral.

Appearances can be deceptive, however. Most of the annual increase in earnings was due to weak wage growth during the spring of 2020 and the fact that job losses were concentrated in low-paid sectors such as hospitality. Underlying pay growth once these factors are stripped out is running at 2%, according to Ruth Gregory, a senior economist at Capital Economics. Threadneedle Street has no need to rush into a decision: it has time to see how things pan out in the next few months.

By Larry Elliott

Source: The Guardian

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Economy Surges Back And Employment Increases First Time In Months

The UK economy is springing back to life and creating more jobs for the first time since February, according to PMI data for March.

The Manufacturing PMI for March read at 57.9, which is above the 55.0 forecast and 55.1 reported in February. The Services PMI – which covers the largest component of the UK economy – read at 56.8, above the consensus expectation for 51.0 and February’s reading of 49.5.

Taking the two together and rebalancing the data to give a better snapshot of the broader economy gives us the Composite PMI which read at 56.6, which is well above 51.1 expected and the 49.6 reported in February.

The IHS/Markit PMI survey is a much-watched indicator of changes and trends in economic activity that offers the most comprehensive timely data to economists.

A reading below 50 represents contraction, a reading above represents expansion.

“The better-than-expected UK PMIs come as firms begin preparations for economic reopening in April and May. This bounceback in activity is likely to drive 4-5% growth in the second quarter,” says James Smith, Developed Markets Economist at ING Bank.

The inference is therefore that the economy is rebounding, and is doing so at a pace that is faster than economists and the market expected.

IHS Markit says the rebound in activity was the fastest recorded in seven months, fuelled by a rise in new orders for the first time since September 2020.

Survey respondents attributed to a rebound in sales ahead of easing lockdown measures, alongside stronger consumer confidence and a surge in demand for residential property services.

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For the first time since the start of the pandemic, service sector activity (index at 56.8) outpaced manufacturing production growth (55.6).

The survey reveals the government’s roadmap for fewer stringency measures in the coming months contributed to the strongest rise in total new work since August 2020.

Service providers noted forward bookings from domestic consumers, while some manufacturers cited advanced orders from hospitality businesses and high-street retailers.

However, exports remain a sore spot for the UK Economy as the survey reveals export sales remained relatively subdued with total new orders from abroad falling for the third month running.

Efforts to rebuild business capacity and respond to rising customer demand contributed to an increase in private sector employment during March.

This finding chimes with official ONS employment data out on Tuesday that showed the UK’s unemployment rate actually fell to 5.0% in January, leading some economists to suggest the peak in unemployment might already be in.

The PMI report shows the uptick in employment in March represented the first upturn in staffing numbers since February 2020 and the rate of job creation was the fastest for nearly two years.

“The encouraging readings on future expectations, job creation and new order inflows meanwhile all point to robust economic growth in the second quarter, especially if virus restrictions are lifted further,” says Chris Williamson, Chief Business Economist at IHS Markit.

The survey reveals that inflation could rise over coming weeks and months as positive trends for output, new work and staff hiring were accompanied by another round of steep input cost inflation during March.

The latest increase in average cost burdens was the sharpest since February 2017. Private sector companies continued to pass on greater operating expenses to clients, as signalled by an acceleration in the rate of output charge inflation to its highest for over three years in March.

The findings come on the same day the ONS reveals UK inflation was softer than economists were expecting in February, however economists are in agreement that all signs point to higher rates of price increases in the future.

Meanwhile, IHS Markit report expectations of rising sales after the national lockdown, and a boost to sentiment from the successful UK vaccine rollout, contributed to an increase in business optimism to its highest since January 2004.

“Dormant businesses were able to plan again with the imminent lifting of UK restrictions and consumers were securing their place in restaurants and holiday venues. Though international travel is still restricted, as long as the fastest rise in consumer costs for three years and the threat of new lockdowns doesn’t halt further progress, we can see more opportunities opening up in the coming months,” says Duncan Brock, Group Director at CIPS, who sponsor the PMI report.

ING’s Smith says these latest numbers probably don’t help us too much in pinning down GDP growth figures for the next couple of months as they tell us more firms are seeing improving conditions, but don’t necessarily indicate by ‘how much’.

“Nevertheless, it’s encouraging and is a reminder that sharply higher growth numbers are on their way,” says Smith.

Written by Gary Howes

Source: Pound Sterling Live

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