13 November 2024: Unemployment jumps to 4.3%

Bank of England Chief Economist Huw Pill believes the Bank still has work to do to tame inflation. Despite voting for a cut in the base rate last week, Pill spoke of his concern that the October employment report published yesterday showed that inflation pressures are still too high to stay at the Bank’s two per cent target consistently.

“As we saw in the labour market data, pay growth remains quite sticky at elevated levels and levels that, given the outlook for productivity growth in the UK, are hard to reconcile with the UK inflation target,” Pill said at a conference organized by Swiss bank UBS.

His boss, Bank of England Governor, Andrew Bailey, said after last week’s MPC meeting that even though the Bank has only cut rates twice since 2020, he expects that any future cuts will be gradual as it assessed the persistence of inflation pressures including from the first budget of Britain’s new government.

Pill said Britain might be behind other economies in working its way through the impact of the pandemic and other shocks in recent years, which could help to explain why investors are pricing higher UK interest rates than elsewhere.

Although the Bank does not base its case on the assumption that the UK needs higher interest rates to combat inflationary pressures, that possibility must be considered.

The interest rate market is pricing in just 0.6% in interest rate cuts over the next twelve months, compared to 1.6% for the ECB and 1% for the Fed. While this may see exports struggle, it will provide some support for the pound.

Data from the Office for National Statistics showed that the unemployment rate rose to 4.3 per cent in the September quarter from 4.0 per cent in the three months to August. The rate was predicted by economists to rise to 4.1 per cent.

Average earnings including bonuses grew 4.3 per cent annually. The ONS said the annual increase was affected by the civil service one-off payments made in July and August 2023. Economists had expected an increase of 3.9 per cent.

Job vacancies decreased for the 28th consecutive period in three months to October, the ONS said. The number of vacancies declined by 35k in the quarter to 831k.

Data showed that paid employees decreased by 5k in October from a month ago but increased by 95k from the previous year to 3040k.

Catherine Mann, the most hawkish member of the MPC, will speak later today. She was the only dissenting voice at last week’s meeting, voting for rates to remain unchanged.

She will certainly repeat her concerns that inflation is not defeated yet and that the employment data backs her unease.

The pound fell to a low of 1.2719 and closed at 1.2745.

Many possible outcomes may result from the election of Donald Trump as the next President of the United States, but by far the most concerning for the global economy is his threat to impose tariffs on U.S. imports of manufactured goods.

He has threatened to “tariff the hell” out of China by imposing a blanket 60% tariff on all Chinese imports while talking about up to a 200% tariff on EVs.

Since the start of Trump’s first term in the White House, and through President Biden’s term, China’s economic growth has slowed from roughly 7% to 4.5%.

The country’s property market has crashed because of massive overbuilding, leading to the rise of empty ghost cities. Youth unemployment rocketed to a new high of nearly 19% in September, dimming prospects for China’s future workforce.

The Chinese leadership is on record as saying it will not allow its economy to be “trashed” by foreign interference. It will be forced to retaliate against any measures that weaken its output.

The pressure the U.S. is putting on China will become a good thing for China in the long term, according to some Asian-based commentators. China has relied on two primary engines to support rapid economic growth over the past 40 years since former leader Deng Xiaoping initiated reforms and started opening the country up. Those have been manufacturing cheap exports to the world by leveraging China’s cheap labour force, and later, spending billions on domestic infrastructure including roads, rail and airports.

But labour has become more expensive with the rise of China’s booming middle class, and the government is running out of new things to build across the country. Since the decline of Russia as a global power, despite the hegemony of Vladimir Putin, China has moved to fill the vacuum.

Trump’s election will cause the somewhat symbiotic relationship the two enjoy where China funds a large part of the U.S. Government debt to allow it to buy Chinese goods to suffer, which could see long-term interest rates in the U.S. rise over time, to deteriorate, significantly, possibly terminally.

The President of the Richmond Fed spoke yesterday of his fears that although inflation is falling, it may “get stuck” at a level above the Fed’s 2% target.

In somewhat contradictory remarks, Barkin said The Federal Reserve is in a position to respond appropriately regardless of how the economy evolves.

The Fed’s focus may turn to upside inflation risks or downside employment risks, depending on how the economy develops.

From here, the labour market might be fine or might continue to weaken.

Inflation might be coming under control or might risk getting stuck above the Fed’s 2% target.

The US economy looks pretty good, and the labour market looks resilient.

There will be remarks from other Fed presidents over this week, which it will be hoped will provide more concrete evidence of the FOMC intentions.

The dollar has continued to charge higher, reaching a high of 106.18 and closing at 105.93.

It is becoming a little monotonous to be considering the number of ways that Germany is suffering currently.

Its economy may not be plumbing the depth of the recession, but every event whether domestic, Eurozone-related, or global seems to be making the situation worse.

Having had stable leadership during the Chancellorship of Angela Merkel in which she was able to promote a strong relationship with Brussels, Olaf Scholz has brought a period of uncertainty, and while the closeness of the previous leadership with Moscow has had to change, the result has been the destruction of cheap energy imports, as Vladimir has pressured Berlin into look the other way over the Russian invasion of Ukraine.

The energy crisis showed Germany’s industry-heavy economic model to be out of date as other members of the EU became more service-based, which allowed them to recover more quickly from the Pandemic.

Ursula von der Leyen, The President of the EU Commission, tried to help, but her heavy-handed intervention in the supply of COVID-19 vaccines saw Germany’s global standing plummet.

More recently, Scholz has favoured an increase in immigration just as the country was veering to the right, with the AfD party making significant gains in state elections. It is now the second most popular political party in Germany and is set to make significant gains in the election which Scholz has called and will take place in the Spring.

Scholz had an uneasy partnership with this Economy Minister, Christian Lindner, with the two falling out over immigration. Linder published a paper detailing his vision for Germany’s economy. This prompted Scholz to remove Linder, who is also the leader of the Free Democratic Party, from his Government, which precipitated the fall of the ruling coalition.

Lindner’s replacement as Economy Minister, Jörg Kukies, told the market yesterday that there will be no budget freeze for this year as a result of the country’s three-way coalition falling apart.

“As things stand, the government would be able to get through the year just fine, he said at the Süddeutsche newspaper economic summit in Berlin.”

The opposition Christian Democrats (CDU) and the Free Democrats (FDP) are opposing the government’s supplementary budget for 2024, which was supposed to pass parliament on Wednesday.

The political turmoil in Germany is overshadowing any attempt to drive forward growth in the region since the country is at the centre of any plans to adopt Mario Draghi’s recent report on productivity and economic output.

The Euro is beginning to feel embattled from all sides, falling to a low of 1.0595 yesterday and closing at 1.0622.

Have a great day!