The labour market statistics for June, released this week by the ONS, show that the UK jobs market remains on a firm footing, with employment continuing to rise and unemployment falling.
However, the strong headline figures mask some significant concerns. The gap between pay and price growth is now significant, and if inflation continues to rise as we expect, this could push UK growth materially lower by slowing household spending – a driver of UK economic growth.
Employment levels may also moderate over the near term as the escalating burden of upfront business taxes and costs, and political uncertainty, dampen firms’ hiring intentions.
The high number of vacancies is further evidence of the growing skills shortage. While employment levels are high by historic standards, businesses report that they are increasingly struggling to find staff with the right skills, which is constraining investment and productivity.
The new government must make it a priority to tackle the UK’s chronic skills shortage, including easing the burden of upfront business costs to help firms recruit and train staff, and deliver a future immigration regime based on the needs of the UK economy.
Inflationary pressures continue to mount for business…
This week, the ONS also released the inflation statistics for May 2017 which saw inflation rise for the second successive month, confirming that price growth is firmly on an upward trend. The rise in May mostly reflects increasing prices for recreational and cultural goods and services in the month.
The continued increase in factory gate prices suggests consumer price growth is likely to maintain its current upward trend for some time to come. Significantly, if the current political uncertainty persists, this is likely to increase the downward pressure on sterling’s value, pushing inflation even higher over the next year.
Higher inflation is a key business concern as it squeezes margins and weakens their ability to invest, particularly during this time of heightened political uncertainty. The BCC’s Quarterly Economic Survey confirms that businesses continue to feel the inflationary pressures, with a significant proportion of firms struggling to absorb the rising cost of raw materials and other overheads – a task made more challenging by the myriad of upfront costs imposed on businesses.
A key focus of the new government must therefore be on easing the current pressure on firms’ cost base by tackling the burden of upfront costs and taxes associated with doing business in the UK. It is also imperative that the MPC provides monetary stability during this period of political instability by continuing to ‘look through’ the expected increases in inflation and keep interest rates on hold.