Late last year and earlier this year, when MoneyWeek was saying that we’d see a strong recovery from Covid, one of the bearish counter-arguments was: “ah, but just wait until the furlough ends – then the trouble will begin.”
It was a reasonable argument. It wasn’t one I agreed with, but I could see why people were making it.
However, the latest employment data proves beyond a shadow of a doubt that it was wrong.
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The good news on UK employment
The UK’s furlough scheme ended at the end of September. The furlough might have been expensive, but it did keep a great many people in their jobs and it was the only reasonable thing to do given that the government mandated a complete shutdown of the economy.
It’s a good example of where state intervention was the correct option. (To be clear, you can certainly then debate the overall merits or otherwise of lockdown – I’m just saying that if the government says “you have to shut your shop” it is then entirely unfair and not at all anything to do with free markets to say “so you must lose your job and your business”.)
Understandably, some were concerned about what would happen when furlough ended. If the economy was still in a fragile state after Covid and the rebound was just a brief bounce rather than sustained, then we could’ve seen a spike in unemployment as furlough turned into redundancies and layoffs, as employers could no longer afford to keep those jobs on.
But that hasn’t happened. Furlough has just ended. But the number of people claiming benefits fell in October while the number of employees grew. As Paul Dales of Capital Economics points out, “it looks as though only a small share of the 1.1 million people that were still on furlough” on the last day of the scheme lost their jobs.
That’s great news. Better yet – and arguably more importantly – the number of job vacancies in the market remains at a record high, even although the unemployment rate is falling fast.
In the three months to September, the unemployment rate fell from 4.5% to 4.3%. That was better than expected. And in September itself, it came in at 4%. And as Dale points out, “in the last week of September, it was 3.5%. That’s lower than before the pandemic.”
In other words, we’ve got an economy with record vacancies and unemployment back to pre-pandemic levels.
Interestingly, given all this, wage inflation actually moderated in the three months to September. In the three months to August, average earnings apparently grew by 7.2%, whereas the figure was 5.8% this time round. The Office for National Statistics also reckons that if you strip out the impact of Covid, it slowed from 4.1% to 3.4%.
I must admit, this does make me wonder just how reliable the statistics are. The ONS admits that it’s hard to adjust for these distortions and it’ll be interesting to see what happens in a year or so.
Anyway – the point is we have a booming jobs market, and we also have the lowest interest rates in history.
Presumably one of those things has to give. Soon-ish.
The next move in interest rates must surely be a bit higher
One of the most obvious implications of this report is that it makes it harder for the Bank of England to delay again on raising interest rates at its next meeting in December.
Unless the next employment report after this one (due in the middle of next month) takes a turn for the truly awful, it does seem likely that the Bank will act – if only because governor Andrew Bailey is probably still smarting from the media and market reaction to the surprise hold we got last time.
Now, this probably isn’t a particularly big deal. A rise in rates next month isn’t something that would make a big difference either to your savings rate or to your mortgage rate at this stage. We’re only talking about going from 0.1% to 0.25%.
The future direction of travel is far more important and that will remain dependent to a great extent on what happens with the recovery – and more specifically, inflation.
However, as I’ve already said countless times, the name of the game today is “financial repression”. That implies the Bank will do its best to lag behind the rate of inflation and drag its feet when it comes to raising rates.
That tactic can only work for so long, but that’s why you’ll be seeing green gilts and mandates that effectively (or explicitly) force institutions to own them rolling out in the coming months and years (or something very similar).
We’ll be discussing various aspects of all this at the MoneyWeek Wealth Summit on Thursday 25 November. Make sure you get your ticket – book here now.
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