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UK in focus: Is good news, bad news?
UK GDP is on track to meet our 0.4% quarter on-quarter growth forecast in Q1. However, the downtrends in wage growth and unfilled vacancies have stalled, while services inflation was higher than expected highlighting the bumpy road ahead for disinflation.
Non-UK nationals in the labour force
Immigration is once again top of mind for many voters around the world as they head to the polls in this record year for elections. But immigration is not just a highly charged social and political issue, it is also a big macroeconomic one, not least because population projections look awful across much of the world. That matters for potential economic growth – which is driven by people and productivity – and not just over the long term.
During the pandemic and since, the degree and type of immigration has impacted significantly on the growth-inflation trade off in many advanced economies, especially the US and UK, so it also has a role to play in determining the labour market outcomes and hence the timing and magnitude of interest rate cuts in 2024-25.
According to the ONS, all of the net increase in jobs created in the UK since the onset of the pandemic have been filled by non-EU or UK nationals. Since 2019, on a net basis over 900k non-UK nationals were employed compared to a net fall of half a million UK nationals. It's worth noting that some caution should be taken when inferring these numbers due to issues surrounding their source. However, they are also in line with the data on visa applications, with over 1million skilled-work visas being granted since 2019, and workforce jobs that shows that the healthcare sector was responsible for more than 40% of the jobs gained in the UK in 2023. Agriculture, education and finance were the next biggest sectors for employment growth.
Higher wage costs place greater focus on productivity
With more non-UK skilled workers joining the UK workforce last year than ever before, we may think that the labour supply and wage challenge would be going some way to being resolved. However, the level of inactivity in the UK has risen by over 700k over the same period, since 2019, of which the vast majority are reporting as suffering from long-term sickness. Therefore, the prospect of a swathe of possible workers returning to the workforce to meet any uptick in demand this year seems unlikely.
Moreover, the minimum salary threshold for foreign workers has risen by nearly 50% in April 2024, potentially reducing the ability of firms to rely on overseas workers to fill roles. As such there is a risk that hiring difficulties become more entrenched adding to near-term wage pressures and possibly inflation persistence. Over the longer-term, surging unit labour costs raise questions as to where UK economic growth will come from without stoking inflation, increasing focus on the need to revive UK investment and productivity growth.
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