Market Update: More Resilient UK Labour Picture Ahead Of Iran Crisis

The latest snapshot of the UK labour market paints a picture of an economy that had been showing signs of more resilience just before the Iran crisis cast a long shadow over the outlook. Employers were taking on more full-time workers, pushing the unemployment rate down to 4.9%, a sign that demand for labour had been holding up better than expected.

There were tentative signs that confidence had been stabilising, as the cloud of uncertainty around the Budget and potential tax rises began to lift. Pay growth came in slightly stronger than anticipated, with average weekly earnings, including bonuses, rising 3.8% year-on-year. Although that marks a slowdown from the previous 4.1%, it still indicates that wage pressures haven’t faded away entirely. Taken together with better-than-expected growth of 0.5% in the three months to February, the data suggests the UK economy had been regaining some momentum.

However, that progress now looks increasingly fragile. Just as companies appeared to be rediscovering their mojo, the escalation in the Middle East and the renewed threat to energy supplies risk sapping confidence once again. So, more hiring plans may be shelved and investment suspended as bosses turn ultra-cautious about the unfolding events.

For policymakers, the easing in wage growth had been keeping hopes of interest rate cuts alive, with pay pressures no longer ringing alarm bells at the Bank of England. But the surge in energy prices and heightened geopolitical uncertainty are raising the prospect that borrowing costs may need to be increased to calm an incoming inflation storm. One interest rate hike is still being priced in by financial markets, and Bank officials are staying wary about how fresh price pressures will emerge. The concern now is that just as the UK economy was beginning to steady itself, a fresh external shock could knock it off course.

However, hopes are being kept alive for a potential deal to emerge which could limit the economic damage, as Pakistan prepares to host fresh negotiations Even though Donald Trump is still threatening to resume strikes, the key Strait of Hormuz remains blocked, and Iran has not confirmed its sending a delegation to the talks, there are expectations that some kind of deal will be reached. However, for now, a ‘wait-and-see’ mood is swirling, with the FTSE 100 flat in early trade while Brent crude is in a holding pattern, trading around $95 a barrel.'