The UK economy lost jobs again in the quarter through August, marking the longest drop in employment since the depths of the coronavirus pandemic and a sign that inflationary pressures may be abating.
Employment fell 82,000 from June to August after a 133,000 drop in the period from May through July, the Office for National Statistics said Tuesday. It was the third consecutive three-month period in which employment has fallen compared to the previous three months, the worst stretch since early 2021.
The ONS changed the way it calculates the figures released Tuesday after delaying its unemployment and employment figures “to produce the best possible estimates.”
UK Economy Sees Longest Run of Employment Declines Since Covid
Change in employment, three-month period
Source: Office for National Statistics
The new calculations indicate that the labor market may be slightly tighter than the ONS’s previous data had suggested. The revised 133,000 fall in employment in May to July under the new methodology was smaller than the 207,000 drop under the old estimates.
What Bloomberg Economics Says ...
“The broad picture remains one of a cooling labor market. The experimental nature of the data is also likely to mean the central bank places more weight on progress made on CPI and pay pressures since its September meeting. That too will give policymakers little reason to hike further – we see rates holding at 5.25% until the second half of 2024.”
—Ana Andrade and Dan Hanson, Bloomberg Economics. Click for the REACT.
The broader picture shows the labor market is loosening, reducing the upward pressure on wages that concerned the Bank of England. Some economists are now concerned that the rise in unemployment threatens to tip an already stagnant economy into recession.
A separate report from S&P Global on Tuesday showed UK businesses are more pessimistic than at any point this year, prompting hiring freezes and staff cuts.
Soaring living costs, higher interest rates and falling exports meant the economy “continued to skirt with recession in October,” said Chris Williamson, chief business economist at S&P Global Market Intelligence in a report Tuesday.
“Gloom about the outlook has intensified in the uncertain economic climate, boding ill for output in the coming months,” he said. “A recession, albeit only mild at present, cannot be ruled out.”
The new labor market figures complicate the narrative for policymakers, who had pointed to the previous ONS data to justify halting a string of aggressive interest-rate increases designed to cool the economy. They expect unemployment to climb gradually and meet again next week to decide on rates having left the door open to more hikes.
“We see enough corroborating evidence to think the official labor market statistics are correctly signaling greater slack,” said Gabriella Dickens, an economist at Pantheon Macroeconomics Ltd.
The pound edged up against the dollar after the release. It traded 0.2% stronger at $1.2277, rising for a fourth straight day to touch an almost two-week high. Traders pared back bets on the likelihood of future rate rises, pricing in less than a 50% chance of another hike by February.
Unemployment held at 4.2% under the new calculation, lower than the 4.3% figure that the ONS previously released. That’s the highest in almost two years and up from as little as 3.5% a year ago when companies were hiring rapidly after the end of COVID-19 lockdowns.
UK Unemployment Holds at Near Two-Year High in August
Source: Office for National Statistics
The central bank expects the jobless rate to rise to almost 5% by the third quarter of 2026 as rate increases slow demand in the economy and curtail inflationary forces. That’s still below the 6.4% unemployment rate in the eurozone.
The new experimental data on employment and unemployment released on Tuesday is being compared with older figures using the previous methodology. Economists have questioned the credibility of the old figures after a collapse in the response rates on the ONS’s labor force survey and a heavy reliance on data from older people, who are less likely to work.
“This new metric shows that in the latest period, the employment rate was down a little, with small rises in the rates for both unemployment and those neither working nor looking for work,” said Darren Morgan, director of economic statistics at the ONS. “This is part of our transformation of the way we measure the labor market where we are introducing an improved Labour Force Survey, asking more people in different ways about their employment status.”
Prime Minister Rishi Sunak’s government has been focused on pushing more people into work and tightening rules on who can claim benefits. The aim is to reduce the level of inactivity — people out of work and not looking for jobs.
Britain lost at least 500,000 people from the workforce during the pandemic, prompting companies to bid up wages to secure the staff they needed to grow and feeding inflationary pressures. While many of those workers have now returned, companies complain they have difficulty finding people with the skills to do the jobs they have open.
The ONS said that economic inactivity edged up 0.1 percentage points to 20.9% under its experimental estimates, though did not explain what had driven the increase. A sharp rise in activity since the pandemic has been caused by soaring long-term sickness, early retirement, and more students, fueling worker shortages. However, it had started to unwind again.
“Today’s statistics also show inactivity has fallen by over a quarter of a million since the pandemic peak,” said Secretary of State for Work and Pensions Mel Stride. “Growing the economy is our priority. That’s why we are bearing down on inflation and bringing in the next generation of welfare reforms to drive down inactivity and help more people to work.”