Bailey watching labour market softening ‘very closely’
Andrew Bailey has said his Monetary Policy Committee are watching signals of a rapidly softening labour market “very closely” in the wake of several soft employment readings and stark warnings of a slowdown from the recruitment industry.
The Governor of the Bank of England told the British Chambers of Commerce’s summit that sticky wage growth had been a significant factor through much of this year in officials’ decision to keep interest rates higher for longer than many had expected.
“We watch [pay] very carefully,” he said. “Wage growth remains an important factor behind the remaining persistence in services price inflation in particular.”
But he added that the momentum behind those rises in the latest data was slowing, pointing to a “significant decline in wage growth in the year ahead”.
Bailey also highlighted a softening in employment , after several years of the labour market being “very tight in the past few years”.
“Real time data from HMRC suggest that the number of payrolled employees fell by 0.4 per cent in the three months to May, and have now fallen in each of the last 7 months, with a contraction of more than 100,000 people on the month,” he said, adding: “Survey-based measures and intelligence from the Bank’s Agents corroborate the pattern of continued loosening.”
Bailey’s comments follow a succession of concerning data on the labour market, which had been holding up better than many economists had feared against continued geopolitical uncertainty and rising tax and cost pressures.
The latest monthly figures from the Office for National Statistics, which are often subject to retrospective revisions, revealed that in May employers shed the most jobs in a single month since the pandemic.
And in the service sector specifically, employment levels have been falling for eight consecutive months according to S&P Global, the longest streak since the financial crash.
Recent data has been supplemented by panicked warnings from headhunting industry heavyweights of a rapid decline in the recruitment landscape.
Writing in Morning Wire on Wednesday, Reed chair and chief executive James Reed branded the the current market as being “among the worst he’s seen”.
“Official statistics show 35 consecutive periods of decline,” he said. “Next month, it will be three years, with vacancies falling from a peak of around 1.3m then to 761,000 now.”
Bailey also cited softer vacancy readings as playing into rate-setters decision-making, telling Morning Wire: “One of the things we look at quite a bit is also the position on vacancies, and that has come down. That too therefore indicates, we think, some softening of the labour market.”
With the next MPC decision in August, Bailey reiterated his uncertainty around the likely impact on prices of the culmination of Donald Trump’s 90-day tariff reprieve next month, and warned the return to a higher trade barrier environment globally could push up or down on UK prices.
He said: “These trade disruptions, could go either way for inflation. For activity, I’m afraid reducing the openness of the economy is negative… but it could either lead to more or less inflation.
“If China starts exporting a lot more stuff into the UK that would have gone to the US, that will tend to push down on inflation, because we’ll get more stuff coming in more supply.”
“But if we get the disruption of supply chains then that would have the opposite effect,” he added. “It would tend to disrupt the supply of stuff and push inflation up.”