Figures published this morning by the ONS showing slower growth in both employment and average earnings in the first quarter of the year indicate that any threat of inflationary pressure from the labour market is receding. This suggests that interest rates will peak at 4.75% and increases the chances of a rate cut later this year, according to John Philpott, Chief Economist at the Chartered Institute of Personnel and Development (CIPD).
Dr John Philpott, Chief Economist at the Chartered Institute of Personnel and Development, said:
ìAlthough employment is still growing, the pace of job growth in the first quarter was much slower than in the second half of 2004. The level of unfilled vacancies has also fallen. And while the renewed fall of 15,000 in the Labour Force Survey measure of unemployment is welcome this is almost exactly matched by a rise in the number of economically inactive people. Claimant unemployment, by contrast, has been rising consistently, albeit modestly, since the turn of the year.
ìThe underlying annual rate of growth of average earnings has meanwhile eased back to 4.1%, almost certainly partly in response to the beneficial effect on pay settlements of more moderate growth in the RPI measure of inflation.î
Employment expectations:
Although todayís figures show a fall in the official unemployment rate, looking a year ahead employers are predicting a significant fall in employment levels, according to an analysis of the latest quarterly Labour Market Outlook from the Chartered Institute of Personnel and Development (CIPD).
The Labour Market Outlook, which reports the findings of a survey of 1,300 UK based employers, shows that todayís downward trend in unemployment can be expected to continue in the immediate term, with nearly a half (49%) of all employers expect to increase total employment levels in their organisation in the next quarter. However, the report also reveals that a net 23% of all employers expect to be employing fewer people a year from now than they are today ñ pointing to a significant loosening in the labour market in the year ahead.
ìTaken together these figures indicate that any upside risk from the labour market to the Governmentís inflation target has diminished of late. With other economic indicators highlighting the growing significance of downside risks, todayís figures should rule out the prospect of any further rise in interest rates in the current cycle.
ìWith the CIPD Labour Market Outlook and other forward looking indicators point to falling confidence in several key sectors of the economy the likelihood is growing of a cut in interest rates sometime later this year.
Cooler labour market should mean interest rates have peaked
CIPD medium term projections suggest employment will fall in next year
