Pace of expansion slowing
Jobless to rise as Brexit grips economy
Unemployment is expected to rise next year as the economy slows and pay growth remains subdued.
While economic activity has held up better than expected since last summer, there are signs, particularly in the consumer sector, that the pace of expansion is slowing. according to the EY Item Club.
This will feed into weaker demand for workers resulting in UK employment falling for the first time since 2009.
Having risen by 1.4% in 2016, the report says that the number of people in work is set to increase by a modest 0.6% this year, before shrinking 0.1% in 2018.
However, the report argues that the consequences of an ageing population and lower levels of immigration for the supply of workers will cushion the impact of softer labour demand on the unemployment rate.
Overall, growth in the economically-active population is forecast to slow from 0.9% to 0.4% this year. As a result, the Item Club expects the unemployment rate to rise from 4.8% this year to 5.4% in 2018 and 5.8% the following year.
Martin Beck, senior economic advisor to the club, says: “The UK labour market may be starting to become a victim of its own success. As the proportion of people in work has climbed ever higher, firms may have found it more difficult to fill vacancies, resulting in greater utilisation of the existing workforce and slower jobs growth.
“On a positive note, slower growth in the workforce may deliver a boost to what has been a long period of insipid productivity growth. With the flow of potential workers slowing, firms are likely to have more incentive to invest in improving efficiency or labour-saving technology.’
The Item Club’s special report says that average earnings growth is expected to pick up marginally to 2¾% in 2017 with pay continuing to rise at a similar rate through 2018 and 2019.
This will remain well below the norm prior to the financial crisis. And prospects for growth in real, inflation adjusted pay look even less bright. Rises in consumer prices in both 2017 and 2018 are expected to be close to growth in cash pay, implying negligible growth in real earnings.
Mr Beck, continues: “Rising employment and falling unemployment have yielded a record low jobless rate, but this has yet to translate into any meaningful boost to pay growth. In explaining this, a shift towards less secure and, on average, less well-paid, part-time and self-employed jobs may have dampened workers’ willingness to push for higher wage demands.”
The report identifies technology and automation as possible headwinds facing pay growth over the longer term. With the potential for technology and machines to displace some workers, the digital revolution is likely to boost the supply of labour competing for other jobs, putting downward pressure on wages in more labour-intensive and low-productivity sectors where machine advances are less applicable.
Mark Gregory, EY’s chief economist, says: “With labour supply expected to slow, businesses need to take a closer look at their future skills needs. They will need to assess how to strike the right balance between allocating capital on skills development, labour savings and labour enhancing technology. This will ensure that they have a workforce fit for their future business strategy.””
Martin Beck, concludes: “The prospect of a rise in unemployment and pay growth remaining weak means that the case for the MPC to keep monetary policy on hold for a prolonged period is a strong one. Meanwhile, our expectation that a revival in pay growth is unlikely will be bad news for the public finances and present another challenge for whoever takes the reins of economic policy after the election.”
* The Scottish private sector made a positive start to the second quarter, according to April’s Bank of Scotland Regional Purchasing Managers’ Index.
The slight upturn on the previous month was driven by the manufacturing sector, which offset shrinking services output. On the price front, input cost inflation accelerated and was steep overall, leading to a marked rise in charges. Job creation was at an eight-month high despite business confidence easing to its lowest in six months.
The seasonally adjusted headline Bank of Scotland PMI rose to 50.6, from March’s four-month low of 50.1. The rate of growth signalled remained below the historical series average since January 1998.
Price pressures remained sharp in April. Furthermore, input price inflation was higher than the UK average for the first time in four months. Panellists noted rising raw material cost and wage pressures as key factors. According to anecdotal evidence, companies then passed on part of the burden of increased costs to customers, as corroborated by a marked rise in output charges in April.
Finally, confidence towards future growth prospects remained positive in April. That said, expectations eased since March, which firms attributed to political and economic uncertainty in Scotland.
Fraser Sime, regional director, Bank of Scotland Commercial Banking said: “April’s PMI signalled a tentative upturn in Scottish private sector growth, with both output and employment increasing at faster rates. The latest survey’s results were driven by a strong manufacturing sector, which moved up a gear in April. There was good news all round from steep production growth, to solid job creation and a further easing of cost pressures.
“Meanwhile, the service sector marred April’s PMI score as business activity in the sector shrunk for the second month running. A faster rise in new orders bodes well, though continued growth in the second quarter remains heavily dependent on the relatively stronger manufacturing sector.”
Retail footfall in Scotland grew by 3.2% in April, the third fastest growth rate of all the nations/regions and the fastest growth in Scotland itself since July 2014, though it was influenced by Easter falling in the period.
Diane Wehrle, marketing and insights director at Springboard, noted that Easter fell in April this year as opposed to March last year.
Ewan MacDonald-Russell, head of policy &e xternal affairs at the Scottish Retail Consortium, said: “A mixed picture this quarter, with footfall rising but offset by a modest but nonetheless worrying increase in the high street vacancy rate.
“That shop vacancy rate is now standing at 9.2% up from 9% in January, and the highest figure in almost two years. In itself that movement is not hugely significant, but with several other economic indicators in Scotland also raising concerns policymakers should pay close attention to the measures they take which affect retail premises; especially the upcoming Barclay review of business rates.
“There was much better news for retailers with strong footfall in April, which pushed the three-month average growth up to 1.8%. In fact, these are the best shopper footfall figures in almost three years, and the highest three-month average we’ve seen in Scotland since September 2014.
“Both high streets and retail parks saw strong rises in footfall, with a 3.2% rise into town centres across the quarter. The only area which has seen reduced footfall has been shopping centres, which have fallen by 2.5%.”