Chart of the Week: Sharp fall in UK employment after Budget tax changes

The ONS’s estimate of the number of payrolled employees in the UK fell by 47,000 in December, following a smaller decline in November. On the face of it, the sharp drop in payrolled employment was troubling. Adjusting for relative population sizes, it is equivalent to a fall of more than 200,000 in US non-farm payrolls, which is the kind of fall one might expect to see in the first month of an NBER recession. In the wake of October’s Budget, we revised down our forecast for near-term growth, to include a period of stagnation through 2024 Q4 and 2025 Q1. Do the employment data cause us to expect something worse than that? For now, no. The most eye-catching tax change — a significant increase in employers’ NICS — would lead one to expect weaker employment, combined with price rises when the changes take effect in April. We expect the MPC to respond with a 25-basis-point cut to Bank Rate when it meets later this week, with a 50-basis point cut more likely than no change. But, absent further sharp falls in payrolled employees, February’s meeting may prove to be the last opportunity for a cut this year. Thereafter it will have to balance a still-weak economy with rising inflation, and the prospect of a renewed acceleration in activity as the spending increases announced in the Budget take effect.

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The views expressed in this article are the views of the author, not necessarily those of LSEG.

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