UK hiring slowing: BoE to cut again next year - ING

James Smith, Economist at ING, notes that the UK’s outlook for hiring still looks bleak and as real wage growth starts to take a significant hit from higher inflation, ING thinks markets are underpricing the risk of 2017 BoE easing.

Key Quotes

“There are still clear risks ahead for the UK labour market and we may be starting to see early signs of a more sustained fall in hiring in today’s jobs report. The “headline” 3M/3M change in employment fell by more than expected to 49k (from 106k). This partly reflects a strong “single month” figure in June dropping out of the moving average. But it is hard to ignore the fact that hiring has taken a noticeable turn following a run of strong numbers just prior to the referendum. Survey measures of hiring intentions continue to point to a significant slowdown over coming months as firms respond to heightened uncertainty following Brexit.”

“The other key metric in this report – wage growth – remained resilient. Excluding bonuses, average weekly earnings increased by 2.4% YoY. To a certain extent, this has been helped along by the impact of the introduction of the National Living Wage earlier this year. But weaker economic activity hits wage growth with a lag, so today's resilient numbers probably still reflect stronger activity in 2015/early 2016.”

“Crucially though, real wages have been, and will continue to be, hit by higher inflation. We expect headline inflation to move above 3% in 2Q17 and with pay increases likely to be moderated given the weaker hiring environment, this drag on real wages could start to dampen consumer spending and sentiment next year.”

“We think that markets are under-pricing the risk of further BoE easing in the first half of next year, despite their recent shift to a neutral bias. We forecast a 15bp rate cut in May on the expectation that economic data will start to deteriorate  and uncertainty will remain heightened, particularly around the time when Article 50 is expected to be triggered.”