Could a Faltering UK Job Market Sink GBP?

The British Pound has been trading cautiously, held back by persistent concerns over the health of the UK’s labor market. With key employment data set for release next week, the pound’s volatility is expected to increase. The currency’s performance hinges on whether the new data confirms a sharper-than-expected cooling of the British economy, which could push the Bank of England (BoE) to adjust its policy.

In Friday’s trading, the British Pound gave back some of its recent gains against the US Dollar, slipping slightly to trade around 1.3550. This marks a minor correction after a positive run that has seen the currency pair climb 0.86% over the past five days. The pound’s performance over longer timeframes remains strong, having gained 4.66% over the last six months and 8.29% year to date. Despite today’s small decline, the pair’s overall momentum appears robust, reflecting a multi-month uptrend that has pushed it significantly higher from its value a year ago.

A Shift in UK Employment

For nearly a year, the UK’s employment dynamic has been shifting, with a notable change in course. The number of people on company payrolls has fallen for the tenth month in the last year, particularly within the hospitality and retail sectors. While the official unemployment rate has seemingly stabilized at 4.7%, this figure may mask a more concerning reality. Some analyses suggest that the true weakness is showing up as a hiring freeze rather than a wave of layoffs, which poses a serious challenge for job seekers.

This softening is underscored by a sharp decline in job vacancies, which have fallen for the 37th consecutive quarter to their lowest level since April 2021. This reflects a growing reluctance among companies to hire new staff, driven by rising wage costs due to factors such as an increase in the National Living Wage and higher national insurance contributions. The impact of this cooling is particularly severe for young people, with unemployment for those aged 16-24 reaching 14.1%, and over a million young people currently not in employment, education, or training.

Wage Growth Under Pressure

Despite the slowdown in the job market, wage growth has remained surprisingly strong. Annual wage growth, excluding bonuses, was 5.0% between April and June. However, this growth is already showing signs of slowing, especially in the private sector. In real terms, wages are still rising by 0.9%, but the continuous decline in job vacancies is expected to slow wage growth further in the near future. This would be a welcomed development for the BoE as it attempts to balance sluggish economic growth with inflation that is still above its 2% target.