UK Employment And Future Rate Policy

By Orbex

The main takeaway from the last BOE meeting is that they are primarily preoccupied with the employment situation.

Inflation in Britain is near the central bank’s target, so they are not particularly apprehensive about it in the short term. So, to calibrate when we can expect the BOE to start normalizing policy, we need to pay attention to the employment figures.

The UK government has implemented a series of restrictions to head off the most recent surge in covid cases. Many business owners are complaining that these conditions create undue burdens. And these in turn make it difficult to serve their customers. They often cite other measures with similar objectives that have less impact on business activity.

Overall, how is the covid situation affecting employment in the UK?

Is the UK falling behind?

The UK’s quick rollout of the vaccine helped them leap to the front of the covid recovery race.

However, that initial advantage has been dissipating lately. This is not only because other countries have caught up in vaccinations. Specifically, the travel industry has been complaining that the government’s measures have significantly hampered their recovery in comparison to their continental counterparts.

The latest to join the chorus is Heathrow (run by Spanish infrastructure company Ferrovial) in their monthly traffic update.

They pointed out that their activity level fell drastically in comparison to other major airports such as Paris’ Charles de Gaul, and Madrid’s Adolfo Suarez in Barajas. Rival Fraport also reported better traffic numbers in comparison to pre-pandemic levels than both Gatwick and Heathrow, the two major points of entry for the UK.

How much of a concern is it?

Tourism represents 10% of the UK’s GDP and 11% of the labor force. Hospitality has naturally been the most impacted during covid and it’s struggling the most to recover given the circumstances.

The government, however, is not ruling out further restrictions. In addition to the potential of increased taxes on consumer discretionary spending, there is increasing concern that the employment situation in the UK could not recover as fast as the current BOE’s trajectory.

The UK employment situation had been steadily improving since March. Nonetheless, it took analysts by surprise last month and turned to the pessimistic side. Analysts are once again forecasting a rosy outlook for employment in August though.

What are the chances that they will be wrong again?

What to look out for

Tomorrow, economists forecast that the UK will announce the creation of 150K jobs in August, up from the 95K reported prior.

This will only marginally reduce the unemployment rate to 4.6% from the previous 4.7%. Meanwhile, they expect the claimant count rate to improve by -26K from -7.8K in July.

In summary, analysts are anticipating more furloughed employees to return to work in the summer, not that there will be a hiring spree of new workers. And this would still support the BOE’s outlook.

On the other hand, if we get a serious disappointment in the employment numbers, economists could reevaluate their outlook for BOE action. Then we might see the pound get weaker, whereas the FTSE 100 will get a little bit of a boost.

Article by Orbex

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