Labour market sentiment shows signs of softening

• Both the job prospects and job security indices from our July Consumer Barometer survey suggest that the recent improvements in head line employment and unemployment may fade over the next few months.  
• Despite a sharp fall in headline inflation during June, inflation expectations remain stable. Interest rate expectations however, fell in July, which suggests that households recognise that the softer inflation outlook could provoke further policy loosening over the coming year.  

TENTATIVE SIGNS OF FADING LABOUR MARKET MOMENTUM  

The UK labour market has proved surprisingly resilient in the face of three successive quarters of falling GDP since 2011Q3 and ongoing headwinds from the euro area. While output fell by around 1.4% between 2011Q3-2012Q2, employment rose by 285k between September 2011and May 2012, while LFS unemployment fell by 38k over the same period. However, these headlines have been accompanied by signs of underlying weakness. For example, the decline in LFS unemployment has been concentrated among those with spells below 6 months, while longer-term unemployment has continued to rise. Moreover, claimant count unemployment, which is based on administrative, rather than household, data has risen by 30k since last September.

On the whole, this headline resilience has been mirrored by the job prospects and job security indices from our monthly Consumer Barometer survey with both measures rising steadily since the start of the year. The latest data for July suggest that the pace of improvement is easing. Although the job prospects index, which can be interpreted as a proxy for labour demand, edged up in July to -51%, its highest level for over a year, the two point increase was much less than in the previous month and below the average monthly improvement since the start of 2012. Moreover, the job security index fell for the first time in eight months and suggests that the recent trend of falling inflows into the claimant count may reverse. If so, then we could expect to see the recent declines in headline unemployment start to unwind.

INFLATION EXPECTATIONS REMAIN STABLE  

Despite the sharper-than-expected fall in headline inflation to 2.4%, its lowest level since June 2009, from 2.8% in May, inflation expectations as measured by the net balance of households anticipating higher prices over the next year edged up slightly from 70% in both May and June, to 71% in July. The weakening economic backdrop, lower energy prices and signs that retailers have brought forward summer sales in the face of fragile consumer demand point to a continuing decline in inflation over the coming months. If this occurs then inflation expectations are likely soften accordingly. Despite the £50bn expansion of the Bank of England ’s Quantitative Easing programme, which was announced on July 4, a full three weeks before the Consumer Barometer survey was conducted, interest rate expectations for the coming year fell back from 43% in June to 39% in July. This might partly reflect the Bank of England ’s explicit reference to a possible cut in the Bank Rate at some point in the minutes of the MPC meeting. It may also reflect a growing recognition by households that monetary conditions are likely to remain extremely loose in the current economic climate.

Note: This month’s Lloyds Bank Consumer Barometer was conducted during 27-29 July 2012. The sample size was 2,006 consumers from all regions of Great Britain and responses were re-weighted to reflect the demographic profile of the population.

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