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In our Market insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
UK pay grows faster than expected
Pay in the UK grew faster than expected and hit a record high in the three months to May, adding to pressure on the Bank of England as it tries to tame inflation.
Employees’ regular average pay, which excludes bonuses, grew at an annual rate of 7.3 per cent in the three months to May, the highest growth on record. This was higher than the 7.1 per cent forecast by analysts, and matched the data observed during the coronavirus pandemic and in the three months leading up to April, which was revised up from an initial estimate of 7.2%.
Sterling briefly rose to a 15-month high against the dollar of more than $1.29 on Tuesday before falling back to trade at $1.2873, up 0.1 per cent on the day. Two-year gilt yields, which move in line with interest rate expectations, dropped 0.1 percentage points to 5.26%, as traders looked to slightly reduce the level at which they expect interest rates to peak early next year.
Growth in total pay, which includes bonuses, accelerated more than expected to 6.9% in the three months to May, up from a revised 6.7% in the three months prior to April.
In March to May 2023, average regular pay growth for the private sector was 7.7%, the fastest increase outside the pandemic period and for the public sector it saw a growth of 5.8%. Markets are now pricing in that the Bank of England will raise its bank rate by another half a percentage point at the next meeting on August 3 2023.
However, there are some signs of weakening in the labour market. The unemployment rate for March to May 2023 increased by 0.2 percentage points to 4%, which was higher than analysts’ previous expectations of 3.8%
The rise in unemployment was partially caused by more people coming back into the labour market, with the economic inactivity rate decreasing by 0.4 percentage points to 20.8 per cent in March to May 2023.
Job vacancies also continued to fall. In April to June 2023, with the estimated number of vacancies falling by 85,000 on the quarter to 1,034,000.
The annual growth in pay was strong across many sectors. The finance and business services sector recorded the largest regular growth rate at 9 per cent, followed by the manufacturing sector at 7.8 per cent — the highest in manufacturing since comparable records began in 2001.
However, despite strong nominal wage growth, earnings did not keep pace with inflation, at present running at an annual rate of 8.7%. When adjusted for inflation, growth in total and regular pay fell by 1.2% and 0.8% respectively.
US jobs growth weakest in over two years
US jobs growth slowed last month in the latest sign that the weight of higher interest rates may be starting to slow the world's largest economy.
Employers added 209,000 jobs in June, the smallest gain seen in more than two years, the Labour Department said. This value was much lower than expected, though the unemployment rate still fell to 3.6%, down from 3.7% in May.
The labour market is being watched closely, as the US central bank lifts borrowing costs to fight inflation. Hiring has remained strong, despite the Federal Reserve's benchmark interest rate jumping to more than 5% in little over a year.
That held true in June, when analysts said the 209,000 jobs added were more than enough to accommodate growth across the labour force, despite it being the smallest number since December 2020, in the midst of the global pandemic.
Wage values also continued to climb throughout the month, with the average hourly pay up 4.4% from a year ago. But the monthly report comes alongside other data, such as a drop in job vacancies, that suggest the labour market may be continuing to cool across the country.
Economists have been predicting a slowdown in previous months, as the higher interest rates force consumers to cut back spending in other areas and make borrowing for business expansions more costly. However, jobs growth had consistently outpaced forecasts and a strong hiring report from private payrolls processor ADP earlier this week raised expectations for a repeat of this pattern.
The ADP figures triggered a sell-off in shares on Thursday, as investors adjusted bets on how far rates might have to climb. However, the Labor Department report painted a slightly different picture, showing government and healthcare firms driving the hiring in June.
Retailers and transportation firms shed jobs, while leisure and hospitality businesses added just 21,000 positions - keeping overall employment in that sector below pre-pandemic levels.
Analysts said they still expected the US central bank to raise rates again at its meeting this month. Though inflation in the US has fallen sharply since last year, at 4%, it remains higher than the Federal Reserve's 2% target.
Forecasts released by the bank at its last meeting indicated that most officials thought they would need to push interest rates higher to stabilise prices.
Sri Lanka’s central bank says more rate cuts are needed for economy to bounce back
Sri Lanka may need to cut interest rates again to further boost growth in its economy, according to the latest data from its central bank.
The governor of the Central Bank of Sri Lanka,disclosed last Friday that there will be more rate cuts to come across the country, even after the central bank lowered its policy rate for a second consecutive month from 12% to 11% on Thursday.
Additional rate cuts will be needed as the country looks to continue combating the rising inflation rates in the Sri Lankan economy.
Sri Lanka negotiated a nearly $3 billion bailout from the International Monetary Fund last year, after thousands of protesters drove out the former president from power, raiding his official residence and office in dissatisfaction over the government’s economic mismanagement.
Stocks listed in its capital Colombo jumped earlier in the week after parliament approved a domestic debt restructuring plan last weekend.
Colombo’s CSE All Share Index jumped by about 8% this week after parliament passed the plan required for the IMF’s bailout package.
Sri Lanka’s total debt has exceeded $83 billion, including foreign debt of $41.5 billion and $42.1 billion of domestic debt.
Prices in Sri Lanka rose by 12% in June, the latest government data showed – a steep decline from the recent peak inflation rate of nearly 70% seen in September last year.
Some economists have predicted inflation could fall to single-digit figures and the economy could turn from contraction to growth by the beginning of next year.
The Sri Lankan economy contracted by 11.5% year-on-year in the first quarter of 2023, gross domestic product figures released last month showed. With the economy’s GDP remaining in negative territory since the first quarter of 2022.
