A great strength of the UK economy since the financial crisis has been the ability to generate new employment, dampening the impact of some challenging economic conditions on household spending. In fact, the unemployment rate of 4.3% reported for the three months to November 2017 was the lowest since 1975 and the employment rate of 75.3% for the same period was a record high. While there has been much discussion about the quality and permanency of new jobs, the key issue from an economic and fiscal viewpoint, is that it’s better to have people in employment than the alternative.
But more recently, the labour market news appears to have shifted, coincidentally at a time MPC policymakers have raised concerns about the consequences for wage growth from tight labour markets. The unemployment rate ticked up to 4.4% for the last three months of 2017, while the employment rate dipped to 75.2%. Meanwhile there seems to be daily news about job losses, either by firms trying to cut costs or due to failure; Carillion, Centrica, Maplins and Toys R Us standout, but Debenhams, Lloyds Bank, Marks & Spencer, RBS, Tesco, Sainsbury’s, Asda, Morrisons and B&Q have also announced plans to cut staff. Restaurants have not been immune, with high profile issues for Jamie’s Italian, Byron Burger and Prezzo.
Shifting buyer habits have been placing pressure on retailers for some time (anyone recently purchased something online?), and the Brexit-related surge in inflation, raising the cost of imported materials and goods, while diminishing the spending power of consumers, has pushed some over the edge. The company failures to hit the news are the highest profile names and the tip of the iceberg; according to Insolvency Service figures, company insolvencies in the UK increased 4.2% to 17,242 in 2017, the highest since 2013, while a report from Begbies Traynor estimated that almost half a million firms may have started 2018 in significant financial distress.
And the pressures on businesses with fragile profit margins, which surely cannot be limited to retail, may be about to increase. The Bank of England appears to be gearing up for a cycle of rate rises, a cycle that the market has already priced into forward curves and term yields. Rate rises, and the expectation of rate rises, will therefore be keenly felt by businesses that are only surviving due to the current low cost of their debt.
MPC policymakers have stressed that rate rises will be gradual and limited, but the Committee’s recent hawkishness has already translated into higher borrowing rates for companies and individuals. The MPC is therefore likely to find itself in an interesting situation – tightening monetary policy alongside a rise in unemployment as companies struggle to deal with the myriad of financial pressures, including rising debt costs (putting aside the effect on employment from Brexit uncertainties, possible trade wars and automation). Even for companies able to cope with higher debt costs, the opportunity cost may be a rise in the staff count.
Under such circumstances, will the current perceptions of gradual and limited still be too fast and too high? Will policymakers continue to raise rates even as unemployment is rising and wage growth consequentially easing? If so, the risk of policy error appears heightened.
I suspect our long-held view of lower for longer remains as the risks for Bank Rate look stacked to the downside.