Two major things happened today in the U.K.: The labor market data surprised on the upside with payroll employment numbers showing some modest job gains. However, this was overshadowed by the Bank of England’s (BoE) decision to keep interest rates steady as the world economy is facing a significant oil shock.
Unemployment and vacancies steady, payroll jobs up
Let’s start with the labor market data. After increasing throughout most of last year, the unemployment rate has kept steady at around 5.2%, showing signs of stabilization. For now, monetary policymakers expect unemployment to peak at around 5.3% later this year before starting a gradual decline. However, this forecast is subject to change, given that a prolonged oil price shock could significantly harm labor markets across advanced economies.
While vacancies showed a marginal drop of 9,000 in February, they have been relatively steady over the 10 months. The large decline that occurred throughout 2023 and 2024 has come to an end with hiring conditions showing signs of stabilization.
The biggest upside of the job report was the better-than-expected employment numbers. February showed an increase of 20,000 payroll jobs. Furthermore, as I anticipated last month, the job numbers for January (and even December) were revised into positive territory. This means that the cumulative employment loss since mid-2024 has been lower than previously thought: only 100,000 instead of 160,000 jobs lost — a meaningful improvement. The last three months now show positive growth of more than 30,000 jobs, according to the preliminary data.
In terms of sectoral performance, there is little meaningful change compared to previous data. Accommodation and retail remain the two sectors with the highest cumulative job losses since January 2024 — exceeding 90,000 and 65,000, respectively. Both sectors have been affected the most by the large increase in employer costs due to the successive minimum wage hikes and tax increases implemented by the Labour government.
One final piece of good news is that salary gains have also stabilized — running at a rate of 4% or lower — depending on which measure one uses. BoE policy makers have been extremely hesitant so far to support the economy with lower rates because of elevated wage growth. Lower salary gains are particularly important now that the BoE is facing yet another shock — surging energy prices — because monetary policy makers might worry less about so-called second-round effects (higher prices feeding back into higher salary demands, leading to even higher prices, and so forth).
Why the oil shock matters for job growth
The massive increase in oil and gas prices has substantial knock-on effects on economic growth and the health of the labor market. Within two weeks, oil prices increased from about $60 per barrel to more than $110. Similarly, gas prices have spiked, too. All this feeds back into inflation via higher domestic energy bills, thereby lowering households’ living standards. Remember that consumption drives around 65% of U.K. GDP; if households have less money available for discretionary spending, it negatively affects economic growth and job creation quite immediately.
The surge in energy prices is also bad news for the private sector, especially for businesses that have high energy costs — think manufacturing, but also hospitality, transportation, and retail.
What it means for interest rates and the economy
Besides reducing household consumption, the energy price shock also has implications for interest rates. Typically, “good” monetary policy would be to disregard the supply shock and tolerate temporarily higher inflation so as to avoid further harming on the economy. However, inflation in the U.K. has already overshot target for every single year since 2021. BoE policy makers have no choice but to respond.
Financial markets are now pricing in two, possibly three, rate hikes for the remainder of the year, compared to two rate cuts before the conflict in the Middle East escalated.
High interest rates hurt the housing market because mortgage rates are getting more expensive. They are also bad for consumption and investment. While the BoE can lower inflation by making borrowing more expensive, it would have negative implications for economic growth and job creation.
What does that mean for recruiters?
The data shows that the U.K. labor market has turned a corner. Job losses have been lower than previously thought and the last three months show modest employment growth. The hiring outlook has modestly improved since the Labour Budget in November.
The bad news is that the turnaround could be undone by the oil shock and the monetary policy response to higher inflation. For now, the BoE will implement a wait-and-see approach as policymakers cannot be confident about how high energy prices will go and how long the shock will last.
That being said, if commodity prices remain at current levels throughout the year, central banks in advanced economies — including the BoE — will have but no choice but to respond to keep inflation in check. Layering interest rate increases on top of a commodity price shock has often pushed economies into recession. While it is too early to tell whether this will happen this time, recruiters should anticipate deterioration in the hiring environment as both households and companies respond to higher living expenses and borrowing costs by reducing spending.
