The labour market is beginning to slow down as rising interest rates take their toll on hiring activity, new data out today shows.
According to the latest research from accountancy firm BDO, demand for workers slowed for the second consecutive month in August bringing BDO’s employment index down by 0.81 points to 110.92.
The previous monthly dip in hiring intentions in July was the first fall in six months, suggesting that higher rates are finally starting to cool the labour market.
“Businesses are reacting to the higher interest rate environment with conservative decisions about hiring,” Kaley Crossthwaite, partner at BDO, confirmed.
The survey comes ahead of crucial labour market figures for July, set to be published by the Office for National Statistics on Tuesday, as the Bank of England considers whether to hike interest rates again.
The Bank has been persistently surprised by the strength of wage growth over recent months, which has raised the prospect of a wage-price spiral, which is when workers demand higher wages to keep up with inflation, forcing firms paying wages to hike costs further.
In June, annual pay growth excluding bonuses hit 7.8 per cent, the highest level since records began in 2001. There was also a rise in the unemployment rate, which climbed to 4.2 per cent from 3.9 per cent.
July’s pay growth figures are expected to show average earnings increased at around 7.6 per cent, slower than last month but still worryingly fast. The unemployment rate meanwhile is tipped to rise to 4.3 per cent.
Although there are signs the labour market is beginning to cool, it remains too tight for rate-setters at the Bank of England to be comfortable.
Data out last week from KPMG and the REC showed reduced recruitment activity, with the fastest fall in permanent placements in over three years.
However, the survey showed that pay pressures remained elevated, with starting salaries continuing to rise in August.
Speaking to MPs last week, Jon Cunliffe, deputy governor at the Bank, said that the labour market was only seeing a “slow cooling”. Cunliffe and governor Andrew Bailey both highlighted developments in the labour market as crucial for the future path of interest rates.
Economists suggested that the data would not be enough to dissuade the Bank of England’s Monetary Policy Committee from a further 25 basis point rate hike when it meets later next week.
Paul Dales, chief UK economist at Capital Economics, said that while the data will likely show that the labour market likely became “less tight” in July, it won’t be a “big easing in wage growth, which probably remained too high for comfort for the Bank of England”.
Pantheon Macroeconomics said in a note that July’s average weekly earnings figures “will probably maintain the pressure on the MPC to raise interest rates a little further”.