Analysts view: Is UK’s falling unemployment masking deeper labour market weakness?
The United Kingdom’s unemployment rate fell to 4.9% in the three months to February, down from 5.2%, according to recent labor market data.
However, analysts from major financial institutions cautioned that the headline figure masks persistent weakness in the jobs market, with concerns mounting about the impact of geopolitical tensions on future employment trends.
The surprise drop in unemployment came ahead of escalating conflict in the Middle East, which analysts say could reverse recent gains. Financial experts highlighted several warning signs beneath the surface of the seemingly positive headline number.
Deutsche Bank noted that while the unemployment rate posted a surprise drop, underlying weakness persists. The firm pointed to an 11,000 fall in employees according to flash HMRC Payroll data, a 136,000 increase in redundancies in the three months to February, and job vacancies falling to 711,000, the lowest level since April 2021. The claimant count rate rose from 4.3% to 4.4% in March. On a positive note, regular pay growth slowed to 3.6%, with private sector regular pay moderating to 3.2%, which could ease Bank of England concerns about second-round inflation effects.
Pepperstone emphasized that the unemployment decline should be tempered by the economic inactivity rate climbing 0.2 percentage points to 21.0%. The firm highlighted that PAYE payrolls fell by 11,000 in March, marking a second consecutive decline. Regular earnings rose 3.6% year-over-year, the slowest pace since the pandemic, though a notable divergence exists between private sector earnings growth of 3.2% and public sector growth of 5.2%. The analysis suggests employers are adopting a more cautious stance amid geopolitical uncertainty.
ING argued the unemployment drop reflects rising economic inactivity rather than stronger job growth, particularly among students. The firm noted consumer-facing employment is showing consistent falls, with private sector employment dropping at a 1.6% annualized rate in sectors including hospitality and retail. ING does not expect the Bank of England to hike rates this year, keeping the Bank Rate at 3.75%.
Jefferies stated that private sector wage growth has slowed to levels consistent with the Bank’s inflation target, while the unemployment improvement was driven by declining participation rather than genuine hiring. The firm noted redundancy rates rose to 4.6 per thousand employees, well above the pre-pandemic norm of 3.7, with HR1 notifications running at their highest monthly level since October 2020.
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