U.K. Labor Market Shows Signs of Slowing as Employment Falls

(Bloomberg) -- The U.K. labor market showed signs of slowing in the third quarter as the number of people in work fell for the first time in almost a year even as unemployment held at a 42-year low.

The jobless rate averaged 4.3 percent between July and September, the Office for National Statistics said on Wednesday. But employment fell by 14,000, the first decline since October last year and the biggest drop since June 2015.

Basic wage growth stayed at just above 2 percent, well below the rate of inflation, and the number people neither in work nor looking for a job rose by the most in more than seven years.

The mixed figures help to explain both why the Bank of England raised interest rates for the first time in a decade this month and why economists reckon the next increase could be a year away.

For officials including Governor Mark Carney, the erosion of slack warranted higher rates. The jobless rate is below the BOE’s “equilibrium” rate and officials expect it to fall further to 4.2 percent. But questions remain over how the labor market will fare as the economy battles the headwinds of Brexit.

Consumer spending is already coming under strain from the squeeze on incomes, with data Thursday forecast to show retail sales fell last month from a year earlier -- the first such drop since 2013.

Basic pay in the third quarter grew an annual 2.2 percent, lagging behind an inflation rate that averaged 2.8 percent in the period. Inactivity climbed by 117,000 in the latest quarter, the most since 2010.

The good news for households is that the crunch may be past the worst. Inflation is forecast to peak close to its current level of 3 percent, and the BOE expects real wage growth to return this year. But delivering a sustained increase in pay depends on productivity.

In the third quarter, output per hour rose by 0.9 percent, the most since 2011, according to a flash estimate Wednesday. But that followed two quarters of falling productivity, meaning that over the last 12 months productivity has grown just 0.6 percent, the ONS said.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson

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