Britain’s job miracle starting to look slightly less miraculous

July 16, 2015

After years of defying gravity and outperforming the rest of Europe, Britain’s job market looks like it might be slowing down.

That means that renewed worries about an imminent rise in British rates, which have just resurfaced this week following hawkish remarks from Bank of England Governor Mark Carney and outgoing rate-setter David Miles, might not be on such a solid footing.

Not so long ago, Britain was dishing out new jobs so astonishingly quickly that Carney — then the new BoE Governor just in from Canada — had to tear up his forward guidance on interest rates based on a future unemployment rate trigger for when to raise rates.

The jobless rate had fallen too far, too fast, and a rate hike from zero surely was just around the corner, went the thinking at the time. The problem was that inflation was too low and heading even lower, preventing the BoE, which targets inflation at 2 percent, from hiking.

Fast forward a year and, Bank Rate is still at a record low of 0.50 percent, and inflation is at zero – not just in Britain but also near there for many of its top trading partners like the euro zone and the United States.

But the jobless rate, while very low, has stopped falling so quickly. It rose for the first time in two years in June, to 5.6 percent.

The claimant count for jobless benefits also unexpectedly rose, breaking a long period of gradually tapering declines.

There is no evidence in the long history of claimant count data that shows such directional blips taking place in anything other than in transitions between net falls and rises in claims.

UK claimant count - June

Like jobless claims data in the U.S., where the central bank there is also contemplating its first rate rise since long before the financial crisis, the claimant count is suggesting that the hiring spree may be losing momentum.

The last time the UK claimant count tapered up this way was in 2010, when the economy was bouncing back from the Great Recession only to go through a period of stagnation, flirting with another slump.

This, of course, could be an exception. Most economists have written off the latest weakening in the jobs figures as a blip. Some have pointed to how many people have left self-employment to look for full-time work or how part-time work dropped very sharply.

JP Morgan economist Allan Monks says:

We do not think firms have entered a phase of material job shedding, as business surveys of confidence and intentions do not support this view. But a stabilization in employment at extremely high levels sounds plausible. 

The focus instead was on another acceleration in wage inflation, to 3.2 percent including bonuses and 2.8 percent without, even though these too came in below expectations. Sterling is near a 7-1/2 year high on a trade weighted basis, on expectation of higher rates.

According to Investec chief economist Philip Shaw:

Our baseline scenario still envisages the first hike taking place in Q1 next year, but our guess is that with pay growth having strengthened, the odds of a move before the end of this year have shortened. But (Wednesday’s) looser set of labour market data do present a decent case to keep policy on a wait and see footing for a while longer. 

If the job market really is shifting down a gear, higher wage inflation won’t be the main concern for long as fiercer competition for jobs sets in again and the pressure subsides.

The jobs expansion has gone on for several years. Most people aren’t even willing to countenance that we may be closer to the end of the hiring spree because in normal times, rates really should have been a lot higher by now. They are still at a record low. But that doesn’t mean a potential warning sign about a slowing job market is something we should ignore.

— Additional reporting by Andy Bruce 

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