February’s unemployment rate of 3.9% remained steady for the third consecutive month. Meanwhile, average earnings, excluding bonuses rose 3.4% y/y in February, implying wage growth continued to outstrip inflation since July 2018. This should help ease consumers’ rising living cost and increase their purchasing power as the real wage growth continued to grow at 1.5% y/y since December 2018.

While the strong wage growth could provide tailwinds for consumer spending in the short term against the backdrop of a benign inflation, there are concerns over the issue of Brexit that will see business investment muted and a growing gap between the unemployment claimant count and number of job vacancies which raises concern over the sustainability of wage growth. On that note, we reiterated our view that the Bank of England (BoE) will remain vigilant with the policy rate.

• February’s unemployment rate of 3.9% remained steady for the third consecutive month. Meanwhile, average earnings, excluding bonuses rose 3.4% y/y in February, implying wage growth continued to outstrip inflation since July 2018. This should help ease consumers’ rising living cost and increase their purchasing power as the real wage growth continued to grow at 1.5% y/y since December 2018.

• Meanwhile, the strong wage growth could provide tailwinds for consumer spending in the short term against the backdrop of a benign inflation. Along with the Easter holiday, it will continue to underpin the strong consumer spending. However, with the Brexit deadline delayed to Halloween, business sentiment is poised to stay muted until there is a clear direction on where Brexit is heading. Business investment fell 2.6% y/y after being seasonally adjusted in Dec 2018. Besides, there is a growing gap between the unemployment claimant count and number of job vacancies which indicates a potential signal of the underlying weakness in the labour market and concern over the sustainability of wage growth.

• On that note, we reiterate our view that the Bank of England (BoE) will remain vigilant with its policy rate. Though we expect the key interest rate to stay unchanged at 0.75% for 2019, the outcome from Brexit will play a significant part on the monetary policy decision. In the event of a disorderly Brexit, we foresee a rate cut to happen with the prospect of QE before the end of 2019. An orderly Brexit should result in economic acceleration that could prompt the BoE to further tighten its policy rate with the final hike to reach 1.50%–1.75% by 2020.

Source: AmInvest Research - 17 Apr 2019