I went into this year cautiously optimistic because the U.K. labor market was seemingly turning a corner. Sentiment data suggested that companies had finally adjusted to the minimum wage and tax hikes implemented under Labour. GDP figures for January and February also exceeded expectations. However, this data is backward-looking. The labor market data released this week suggests that employers began cutting jobs in March. This could be an early sign of what’s to come as the oil price shock starts to affect advanced economies.
Economic momentum that didn’t last long
Monthly GDP numbers show that the UK economy performed well at the start of this year. There was a significant surge in economic activity in February (+0.5%), largely driven by the service sector. Alas, this data is already outdated, as it reflects economic conditions before the oil shock hit.
More timely survey data shows that all sectors are already experiencing a slowdown in March as the oil shock drives up inflation and reduces growth. The decline in the PMI (Purchasing Managers Index) numbers to just over 50 indicates that the economy is basically stagnant now.
While the unemployment rate has fallen back to 4.9%, the data is backward-looking and potentially even inaccurate due to the low response rate of the Labour Force Survey. Furthermore, we are seeing an increase in economic activity as some job seekers — especially younger workers — abandon their job search. More reliable payroll jobs numbers suggest that the labor market outlook is worsening.
March Job losses a sign of things to come?
The UK economy lost around 6,000 payroll jobs in February prior to the oil shock. Job losses in March came in at 11,000, potentially an early sign that companies are responding quickly to the worsening economic outlook.
The OECD is forecasting that inflation in the U.K. is rising by around 1.5 percentage points this year (from 2.5% to 4%). At the same time, economic growth is expected to slow to 0.7%, down from an earlier forecast of 1.2%.
Transportation and manufacturing are being squeezed by surging oil prices, while housing is hit by higher interest rates. Hospitality and retail suffer from the decline in consumer spending.
Employers will continue to shed jobs in the coming months as the effects of the oil price shock continue to ripple through the economy.
Vacancies continue to fall as demand slows
In line with falling economic momentum, employers’ hiring demand continues to fall. The total number of vacancies has fallen to 711,000, the lowest number since 2014 (outside of the pandemic).
Inflation outpacing wage growth
Sticky wage growth has been one of the biggest obstacles for the Bank of England (BoE). It has prevented monetary policy makers from providing additional support to the economy, even as the labor market has steadily weakened, because rising wages feed into higher inflation.
The good news is that nominal wage growth has now normalized. Private sector compensation is increasing at around 3.5%, which should ease the BoE’s concern about another wage-price spiral as the oil shock hits the economy. Labor market conditions are simply too weak for workers to demand higher compensation.
The flip side of this trend is that workers’ purchasing power will deteriorate again. After more than two years of real wage gains, workers will see their inflation-adjusted pay checks decline with inflation moving closer to 4%.
This will put additional pressure on the economy and affect various sectors — accommodation, hospitality, and retail — as consumer spending falls.
What does this mean for recruiters?
From a hiring perspective, the U.K. labor market is extraordinarily weak. Job seekers, especially younger workers, are facing the toughest market in more than a decade. Even before the latest oil shock, employers were already facing elevated global uncertainty, creating a reluctancy to hire.
Facing this new economic crisis, expect an even more cautious approach when it comes to workforce planning. UK employers have already shed jobs throughout February and March. We should expect more layoffs in the pipeline in the coming months as the oil price shock is creating higher inflation and slow economic growth.
