Brexit Pay Squeeze Begins as U.K. Labor Market Loses Steam

  • Real incomes rise at the slowest rate since early 2015
  • Employment growth slows to 106,000 in quarter through August

Is Latest U.K. Labor Data the Calm Before a Brexit Storm?

British consumers are starting to feel Brexit’s bite.

Real wages are rising at the weakest pace since early 2015, data published Wednesday show, as oil prices and the weaker pound stoke inflation. The pressure looks set to intensify with employment growth slowing and some economists predicting price gains as fast as 3 percent next year.

“There are signs of cracks appearing in the U.K. labor market after resilience in the run-up to, and immediate aftermath, of June’s Brexit vote,” said Howard Archer, chief U.K. and European economist at IHS Global Insight. “Muted earnings growth threatens to weigh down on consumers’ purchasing power along with markedly rising inflation.”

Signs of the crunch come a day after data showed inflation hit 1 percent in September, the fastest in almost two years. While wages are still rising faster, they may not be able to keep up for long. That will undermine consumer spending, the U.K.’s economic growth engine. Gap’s Banana Republic chain plans to close its U.K. stores next year as sales slip.

The most recent inflation and unemployment data also predate sterling’s 5 percent drop this month. Barclays Plc on Tuesday revised their 2017 consumer-price growth forecast to 2.3 percent from 1.9 percent. The pound whipsawed between gains and losses Wednesday, leaving it little changed at $1.2308 as of 11:55 a.m. London time.

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Jobless Rate

The number of people in work rose by 106,000 in the quarter through August, down from increases above 170,000 in recent months, the Office for National Statistics in London said on Wednesday. While the gain was enough to keep the jobless rate at an 11-year low of 4.9 percent, nominal incomes are rising just above 2 percent a year. Adjusted for inflation, basic pay gains slowed to 1.7 percent.

The outlook for faster inflation and slower wage growth underscores the dilemma facing Bank of England policy makers as they consider whether to add to stimulus measures put in place following Britain’s vote to leave the European Union. Officials have indicated they may loosen policy again and more than 70 percent of economists in a Bloomberg survey expect an interest-rate cut on Nov. 3.

While the economy has held up better than expected since the June EU referendum, a sharp slowdown is predicted next year with firms already reporting cuts to hiring and investment plans. Figures for August alone show the unemployment rate rising to 5 percent from 4.7 percent.

Next Year

The number of people out of work rose for the first time since February. Jobless claims -- a narrower measure of unemployment -- increased for a second month. Basic pay growth accelerated to 2.3 percent from 2.2 percent.

“The labor market will probably maintain reasonable momentum into year-end,” said David Tinsley, chief European economist at Exane BNP Paribas. “But next year it’ll be much harder, and unemployment should rise. At the same time, with inflation picking sharply, real wage rises will likely slow very sharply.”

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