Interest rate cuts are drawing ever nearer after new data this morning showed that slack continued to build in the labour market, but it is a painfully slow process.
Although almost every measure suggested a softer labour market than expected, the downside surprises were small, which demonstrated the labour market is still tight in historical terms.
Wage growth slowed, but only slightly. Unemployment rose, but it remains very low. Vacancies have fallen for 20 consecutive quarters, yet there are still 100,000 more vacancies than pre-pandemic.
Most economists agreed the figures would not dramatically alter the Bank of England’s thinking.
Policymakers are concerned about a tight labour market and will remain worried after today’s figures – albeit marginally less so. A summer rate cut, probably in June, looks the most likely option.
Yes, the labour market has loosened. But it is worth asking why it remains so tight despite such an aggressive burst of monetary tightening.
Clearly, the labour market is not tight because of a booming economy – after all, the UK fell into a shallow recession in the second half of last year.
Instead, it is tight because of structural changes since the pandemic.
Half a million fewer people are in work compared to pre-pandemic, making the UK the only G7 nation where employment is still below pre-Covid levels.
This reflects the rise in economic inactivity, which, in turn, has been fuelled by long-term sickness. A record 2.8m people were inactive due to long-term sickness in the final quarter of last year.
Speaking on BBC’s Today Programme, Liz McKeown, director of economic statistics at the Office for National Statistics (ONS), said young people were a large part of the explanation.
“If we look over the last year, we’ve seen that increases in inactivity have been concentrated in the younger age groups, particularly in that 16-24-year-old age group. We’ve seen that increase by 248,000 over a year,” she said.
McKeown said it was impossible to tell if the most recent increase in inactivity among young people was a result of sickness. Still, recent research from the Resolution Foundation showed that young people are more likely to experience a common mental disorder than any other age group, a complete reversal of the case 20 years ago.
This means people in their 20s are more likely to be inactive than those in their 40s.
The labour market is slowly but surely progressing towards a position where the Bank of England is happy to start cutting rates. However, if the government is unable to tackle the UK’s sickness problem, then the economy will be far more exposed to future inflation shocks.
“Getting more people from inactivity into employment is Britain’s biggest labour market challenge of the 2020s,” Louise Murphy, senior economist at the Resolution Foundation, warned.