South: Slowdown in economic growth will see employment falling

The UK labour market is set to face a rockier period over the next few years with unemployment rising as the consequences of a slowdown in economic growth, and pay growth remaining subdued, according to the EY ITEM Club special report on the labour market published today.

While economic activity has held up better than expected since last summer, there are signs, particularly in the consumer sector, that the pace of expansion is slowing. According to the EY ITEM Club this will feed into weaker demand for workers resulting in employment falling for the first time since 2009. Having risen by 1.4% in 2016, the report says that the number of people in work is set to increase by a modest 0.6% this year, before shrinking 0.1% in 2018.

However, the report argues that the consequences of an ageing population and lower levels of immigration for the supply of workers will cushion the impact of softer labour demand on the unemployment rate. Overall, growth in the economically-active population is forecast to slow from 0.9% to 0.4% this year. As a result, the EY ITEM Club expects the unemployment rate to rise from 4.8% this year to 5.4% in 2018 and 5.8% the following year.

Martin Beck, senior economic advisor to the EY ITEM Club, commented: “The UK labour market may be starting to become a victim of its own success. As the proportion of people in work has climbed ever higher, firms may have found it more difficult to fill vacancies, resulting in greater utilisation of the existing workforce and slower jobs growth. 

“On a positive note, slower growth in the workforce may deliver a boost to what has been a long period of insipid productivity growth. With the flow of potential workers slowing, firms are likely to have more incentive to invest in improving efficiency or labour-saving technology.”