UK: Brexit exerting a toll on jobs? – ING

James Knightley, Senior Economist at ING, suggests that with firms increasingly taking a “wait and see” approach given the proximity of the Brexit referendum, there is the clear risk of a weak outcome in today’s UK jobs report.

Key Quotes

“The uncertainty generated by the 23 June referendum on the UK’s ongoing membership of the European Union is translating into a clear loss of economic momentum. Corporates are taking a “wait and see” approach to both hiring and investment with business surveys, such as the purchasing managers’ indices, showing significant declines in orders, output and employment. We are also seeing weaker consumer confidence readings and evidence of a slowdown in the property market. Consequently, 2Q economic activity is likely to show growth of 0.3% QoQ at best.

This rather pessimistic view is likely to get support from today’s UK labour report. While it is tight with the number of job vacancies exceeding the number of people claiming unemployment benefits, we are of the view that businesses are going to be pulling back on hiring given the high level of economic uncertainty. This could see employment growth turning negative, unemployment rising and wage growth edging lower.

If the UK does vote to remain a member of the EU we think that the UK economy will bounce back. However, the slowdown in UK economic activity has been more significant than we had thought likely and it could therefore take longer for the recovery in investment and hiring to come through. The referendum is right at the end of the second quarter and it is unlikely that businesses would suddenly start to spend immediately at the beginning of 3Q. As such we are thinking that growth is more likely to recover strongly in 4Q16/1Q17, which dramatically reduces the likelihood of a 4Q rate hike from the Bank of England.

We recently reduced our interest rate profile for 2017 so that our forecast for Bank Rate for end-2017 is now 1% versus 1.75% previously. Moreover, the slowdown in the jobs market is likely to mean pay growth is not as vigorous as we had expected, therefore dampening medium-term inflation pressures. This gives the BoE room to leave monetary policy looser than we had previously been forecasting.”