The pound has remained supported despite US dollar strength, helped by positive jobs data released this Tuesday morning. The good UK jobs data is also supporting expectations of further interest rate hikes by the Bank of England (BoE).

Chancellor of the Exchequer, Rishi Sunak, has welcomed today’s data and said that the “figures are proof that the jobs market is thriving, with employee numbers rising to record levels, and redundancy notifications at their lowest levels since 2006 in December.”

Unemployment rate drops

The jobless rate fell to 4.1% during the quarter of September and November, according to the Office for National Statistics. After the end of the furlough scheme, the labour market has proven to be resilient and has continued to grow stronger in November. While wage growth slowed down, it remained above 4.2%.

The ONS estimates that employers added 184,000 more staff in December, pushing payrolls higher, to 409,000, which represents 1.4%, above pre-pandemic levels.

Vacancies increased too, with 1,247,000 vacancies in October-December. Most industries have shown a high number of vacancies, but the ONS warned that the rate of growth in vacancies has slowed. There are 462,000 more vacancies than before the pandemic. The redundancy rate has fallen which means that the end of the furlough scheme did not significantly affect the jobs market.

Economic inactivity rate rose by 0.2% to 21.3%. This suggests that an increasing number of people have left the labour market, either because they have retired, started studying or are ill.

Consumer price inflation (CPI) rose to 5.1% in November and is expected to hit 6% by this spring when energy bills increase.

Wages

The ONS reported that wages fell as prices rose in November: “In real terms (adjusted for inflation), total and regular pay have shown minimal growth in September to November 2021, at 0.4% for total pay and 0.0% for regular pay; single-month growth in real average weekly earnings for November 2021 fell on the year for the first time since July 2020, at negative 0.9% for total pay and negative 1.0% for regular pay.” The ONS showed that public sector was hit by the pay squeeze: “Average total pay growth for the private sector was 4.5% in September to November 2021, while for the public sector, it was 2.6%; all sectors saw growth, with the finance and business services sector seeing the largest growth rate at 6.8%.”

Cost of living

The UK’s cost of living is going to get worse according to Stephen Evans, chief executive of Learning and Work Institute. He warned that 2022 “will be dominated by the cost of living crunch and labour shortages.” He stressed that today’s data has shown that prices rose faster than wages, and with inflation pushing higher and further tax rises households will struggle. He clarified that the total number of working people was still below pre-pandemic levels, while the growing number of those being sick meant that there are now one million less people working than before the pandemic.

The chancellor, Rishi Sunak, highlighted the positive figures and said the government’s plan for jobs was creating opportunities for all including traineeships for young people and sector-based work academies for those changing careers.

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The pound held on its gains and hit a fresh one-week high against the dollar. The figures released by the Office for National Statistics showed that retail sales increased by 0.8% in October and were 5.8% higher than February 2020 levels. The rebound in retail sales strengthens the case for an interest rate hike in December by the Bank of England.

The retail sales data is in line with the rise in GfK consumer confidence. Both reports are encouraging and demonstrate that the UK economy is on the right track.

UK retail sales

Retail sales rose more than expected as consumers indulged in an early Christmas spending on toys and clothes. Retail sales rose for the first time in six months, with a 4.2% surge in spending at department stores, clothing outlets, sports equipment stores, and second-hand shops.

The ONS explained that clothing stores reported a 6.2% rise in October and the most common items bought were toys, clothes, shoes and accessories, helping bring sales close to their pre-pandemic level. More particularly, non-food stores’ sales increased by 4.2% in October 2021, with clothing stores sales only 0.5% below February 2020 levels. Automotive fuel sales fell by 6.4% in October 2021 while food store sales fell by 0.3% in October 2021. The proportion of retail sales online fell to 27.3% in October but was still higher than those of February 2020.

The ONS also reported that there was a backlash to fast fashion, as more consumers turned towards second-hand clothing. With household budgets squeezed, more people preferred charity shops for financial reasons.

Shortage fears boosted spending in October

Halloween and early Christmas shopping has helped boost spending. Helen Dickinson, chief executive of the British Retail Consortium said that retailers were relieved by the improvement in sales. Online sales remained above pre-pandemic levels while Halloween helped to boost spending further with chocolates and children’s costumes’ sales.

However, supply chain problems remain while higher prices and energy bills will put more pressure on households.

UK consumer confidence

Consumer confidence across the UK has also risen more than expected. The UK consumer confidence index, which tracks how consumers feel about their finances and the economy, rose 3 points to minus 14 in November, according to research company GfK. While consumers face rising prices and are not as confident about their personal finances, they were willing to buy expensive items. Joe Staton, Client Strategy Director at GfK, explained that headline consumer sentiment was higher despite rising inflation and a growing cost-of-living squeeze. He expressed his concerns though, as he highlighted that 2022 would be a tough year, despite the rise in both physical and virtual retail sales that showed that consumers were ready to return to normality.

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Sterling rallied following strong labour data which has now strengthened the case for a Bank of England interest rate rise in December.

ONS jobs report

The ONS data showed that job vacancies reached 1.17 million in the three months to October due to worker shortages. The UK economy is recovering but inflation remains a concern. The unemployment rate has fallen to 4.3%, which is much lower than expected and near to its pre-pandemic level. British employers hired more people in October after the end of the government's furlough scheme. The number of business staff on payrolls increased by 160,000 to reach 29.3 million, which is 0.8% higher than February last year before the pandemic began.

Sam Beckett, head of economic statistics at the Office for National Statistics (ONS), said: "It might take a few months to see the full impact of furlough coming to an end, as people who lost their jobs at the end of September could still be receiving redundancy pay. However, October's early estimate shows the number of people on the payroll rose strongly on the month and stands well above its pre-pandemic level."

Rushi Sunak, the chancellor of the exchequer, said that Tuesday’s report shows the success of the job retention scheme: “Today’s numbers are testament to the extraordinary success of the furlough scheme and welcome evidence that our Plan for Jobs has worked. We know how vital keeping people in good jobs is, both for them and for our economy – which is why it’s fantastic to see the unemployment rate falling for 9 months in a row and record numbers of people moving into employment. Our Plan for Jobs is at the heart of our vision for a stronger economy for the British people, with schemes like Kickstart and Sector Based Work Academies continuing to create opportunities for people up and down the country.”

The ONS also said that in October the number of people seeking out work benefits fell by 14.9K, despite that after the end of the government's job support scheme an increase in unemployment would have been expected.

Bank of England and interest rates

The jobs data has increased the likelihood that the Bank of England will raise interest rates from their record lows before the end of the year. Analysts have expected the Bank to raise rates earlier this month, but it decided to keep them on hold. The governor of the Bank of England Andrew Bailey told MPs that the Bank wanted to see evidence and official data of the impact of the end of furlough before it made a move.

The pound rose ahead of the jobs report following the parliamentary appearance of members of the Bank of England who said an interest rate rise could happen at any of the upcoming Monetary Policy Committee meetings. Appearing before UK lawmakers on Monday Bank of England governor Andrew Bailey said that the labour market is heading in a direction consistent with higher interest rates. He said that the labour market is "becoming significantly tighter" and that the transition out of the furlough scheme has not led to higher unemployment. Bailey noted that the MPC will have a clearer picture at the next policy meeting.

Paul Dales, chief UK economist at Capital Economics, explained that the data was positive and if the next jobs report is equally strong then the Bank will have enough reasons to raise interest rates. He said: "Overall, it doesn't look as though the labour market loosened much after the end of the furlough scheme. If the next labour market release on 14 December tells a similar story, we think that will be enough to prompt the Bank to raise interest rates from 0.10% to 0.25% at the meeting on 16 December."

The Bank believes that a strong labour market could also mean higher inflation which can be rectified by higher interest rates.

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The pound fell on Thursday to its lowest levels in 2021 against the US dollar, after the release of the GDP report which showed the UK economy grew slower than expected in the last quarter.

The pound had already fallen last week when the Bank of England didn’t raise interest rates, and fell again on Wednesday when higher US inflation pushed the dollar higher.

The longer-term UK economic outlook is creating concerns, after the NIESR thinktank warned earlier this week that Britain’s economy could potentially experience a long period of stagnation that will hurt household incomes and plans to level up the regions.

Chancellor of the Exchequer, Rishi Sunak, has warned about the challenges ahead as the economic recovery from the pandemic continues: “As the world reopens we know that there are still challenges to overcome. That’s why at the Budget last month I set out our plan to build a stronger economy for the British people. We’re continuing to support businesses, jobs and people so that we can achieve our vision of a high-skill, high-productivity economy where work is rewarded.”

Economic growth slowed to 1.3% in Q3

The UK economic recovery slowed in the third quarter of 2021. UK GDP rose by 1.3% between July and September, according to the Office for National Statistics. This is below the 1.5% expected by economists. Following the third lockdown, Britain’s recovery slowed due to the rising number of infection cases, the pingdemic and global supply issues.

In the third-quarter, as restrictions were being lifted, the economy expanded 5.5% in the three months to June.

Services recorded the fastest growth, with a 30% jump in business for hotels and restaurants which helped the GDP to rise by 1.6% over the quarter. On the other hand, manufacturing and construction weakened.

UK economy grew 0.6% in September

The UK economy did grow in September, which was better than expected. July GDP growth was revised to 0.2% , while August’s estimated growth went from 0.4% to 0.2%. This means the UK economy is 0.6% smaller than in February 2020.

Paul Dales of Capital Economics said that the rise in GDP in September shows that the UK economy gained some, but this will “fizzle out over the coming months.” He clarified that progress will slow the next 6-9 months as shortages persist and businesses and households’ spending power wanes due to higher taxes and increased utility prices. He added that if the Bank of England decides to raise interest rates, this won’t be above 0.5% during 2022.

The slowdown in third quarter growth follows the disappointing news from that Bank of England that interest rates won’t be raised any time soon, despite rising inflation. The Bank wants to wait and see how the economy will respond following the end of the furlough scheme in September, as well as other persistent issues such as the supply chain crisis.

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The pound fell following disappointing retail sales and a drop in the GfK Consumer Confidence survey, but reversed losses after the release of better-than-expected Preliminary PMI data for October.

PMI

The Markit/CIPS Manufacturing PMI for October came at 57.7, higher than the expected 55.8. The Services PMI also came at 58, higher than the 54.5 forecast and September’s reading of 55.4. The Composite PMI came in at 56.8, also above the forecast of 54 and the previous month's 54. IHS Markit’s Chief Business Economist Chris Williamson said that the flash PMI data was higher than the average of 54.0 before the pandemic and showed that the GDP grew each quarter 0.7%.

Markit reported that activity increased as the private sector growth reached a three-month high, with strong business and consumer spending. Service providers were the main driver behind the recovery. Employment numbers also rose as improved customer demand and confidence about the business outlook strengthened. Pressures from higher costs and staff shortages will however persist.

Retail Sales

Earlier on Friday, the ONS reported that UK retail sales fell in September. The pound dropped following the disappointing news, as it was shown that the economic slowdown might be worse than expected. Retail sales for September were down 2.6% year-on-year, lower than the expected 1.7%.

Even as we move into the Christmas period, higher gas prices will keep operating costs high and reduce consumer spending power.

November interest rate hike

The pound will also be at risk from the Bank of England disappointing markets and not proceeding as expected with the interest rate hikes. The markets now see a November interest rate hike (from 0.1% to 0.25%), as a 56% possibility, which is down from 90% earlier this week, after Bank of England governor Andrew Bailey suggested the BoE will have to act to control inflationary pressures.

BoE chief economist Huw Pill told the Financial Times that the Bank would have a "live" decision to make at its next meeting on the 4 November. While he declined to say how he would vote at the Bank’s meeting next month, he said "it is finely balanced": "I think November is live."

The UK interest rate has been at a historic low of 0.1% since March 2020. The view that November’s meeting is “finely balanced” may have encouraged traders to reconsider the odds of action next month.

GfK Consumer Confidence survey

Consumer confidence was also down in October, at its lowest since February. Consumers are concerned with the future of the economy. The possibility of a cold winter coming while dealing with fuel and food shortages, Brexit and surging inflation, as well as interest rates affecting the cost of borrowing, not to mention Covid-19 cases rising, does not sound especially promising. The Petrol Retailers Association (PRA) has said that all-time highs seen in April 2012 of 142p per litre for petrol and 148p for diesel will be surpassed by the end of October. Average prices for petrol and diesel had reached 141.35p and 144.84p respectively on Tuesday, according to Experian Catalist UK.

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UK inflation has fallen slightly but remains above the Bank of England’s target. According to data from the Office for National Statistics (ONS), UK CPI inflation eased slightly to 3.1% in September, from 3.2% in August—the highest in nine years.

The pound softened on Wednesday morning following the inflation data, as analysts expected the September reading to remain at 3.2%.

The slowdown is mostly due to the effects of lower prices of dining out last month compared to last September, when prices rose following the end of the Eat Out to Help Out scheme.

BoE

The data comes after Bank of England Governor Andrew Bailey said that the central bank will have to act to ease inflationary pressures – raising expectations for earlier rate hikes. According to economists, the bank’s task is a difficult one, as it expects inflation to reach 4% in the current quarter, with higher interest rates expected to ease it. However, the economy is struggling with higher costs and rising commodity prices, which interest rates have no power over.

Inflationary pressures rise

The cost of UK company goods and services continued to rise last month, affected by the supply chain crisis. Output price inflation rose to 6.7% per year in September, from 6% in August. Inflationary pressures are building in the economy as producers increased their prices, passing on costs to consumers. Companies reported that input prices increased by 11.4% year-on-year in September. Manufacturers faced commodity costs and transport costs due to shipping issues and a shortage in lorry drivers.

Economists: inflation is temporary

Economists are warning that September’s fall in inflation will be temporary. Costs rose due to supply issues and the higher energy price cap. The persistent supply-chain disruptions and energy price effects could push inflation higher above 4% early next year.

Senior economist at Royal London Asset Management Melanie Baker, expects more inflation. He warned that energy bills could push consumer price inflation further, which will reduce real income growth for many and add to some of the economic challenges in 2022.

Paul Dales of Capital Economics predicts inflation to reach 5% next April, when Ofgem hikes the energy price cap again. He noted: “However, this feels a bit like the lull before the storm as the 12% rise in utility prices on 1st October will probably lift CPI inflation to around 3.8% in October. And we think inflation could then climb to around 5.0% in April next year due to a further rise in utility prices and the upward influence from global/domestic product shortages. With underlying wage growth and inflation expectations rising, the BoE is concerned that higher inflation will become embedded in the system. That’s why it become much keener to raise interest rates.”

Dales explained that he doesn’t expect interest rates to be raised as far as 1.00% by the end of next year, since higher inflation will weaken the outlook for activity and with supply shortages easing, inflation will eventually fall to around 2% by the end of next year.

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The pound rose against the US dollar following strong UK labour-market numbers. British employers added a record 241,000 staff in August, pushing the total number of employees on company payrolls above pre-pandemic levels, official data showed on Tuesday.

The latest unemployment report by the Office for National Statistics shows job vacancies rose above one million for the first time since records began as the UK economy continues to recover from the Covid-19 pandemic, while payrolls rose by more than expected. The strong data will possibly help persuade Bank of England policymakers that perhaps UK monetary policy could be tightened sooner than expected.

Jobs data

The latest unemployment report showed the number of vacancies in the three months to August to have reached above one million, as firms struggled to fill positions mainly in the hospitality, transport and storage sectors. It also showed a lower unemployment rate and a monthly increase in August payrolls.

The ONS stated: “The fastest rate of growth was seen in other service activities, which grew by 93.3% (12,500), followed by transport and storage at 76.3% (20,300) and accommodation and food service activities at 75.4% (57,600). In the latter two categories labour demand has increased rapidly while staff availability fell because of a mix of employees leaving these sectors to find employment elsewhere and a reluctance of workers to return to their previous roles.”

Minister for Employment Mims Davies MP has welcomed the rise in payrolls and said: “As we continue to push ahead with our recovery, it’s great to see another significant fall in unemployment and the number of people on payrolls rising by 241,000 in August – the biggest monthly increase on record – showing our Plan for Jobs is working. We’re helping employers recruit for the record number of vacancies out there, particularly in growing sectors, and supporting people of all ages and backgrounds to overcome barriers, land their next role, and progress in work.”

While payroll employment is back at pre-pandemic levels, there are still many years ahead of recovery, with employment more than 700,000 down and long-term unemployment up 45%. There are still more than a million people furloughed and with the scheme ending this month, more people will be looking to find employment.  

Furlough scheme concerns

Economists and politicians are worried that with the furlough scheme ending this month, jobs recovery will be hurt, after the rise in payrolls and vacancies. A lot of furloughed staff might not even return to their jobs as a lot have had their wages subsidised and might not be kept into full-time employment.

There is also a skill shortage as many industries have reported a lack of available labour and hiring difficulties. With Covid adding more uncertainty after Brexit and the new national insurance tax adding more costs to employers, it is unclear how businesses will respond to future hiring needs.

While the data is positive for the pound, investors remain cautious ahead of Wednesday’s UK inflation data, which could show an increase in the core rate in August to 2.9% year/year from July’s 1.8%.

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The pound rose against the euro, the US dollar and other major currencies after the release of better-than-expected UK inflation numbers. UK inflation rose to 2.1% for May according to the ONS, which is now above the Bank of England's 2.0% target.

High inflation means that the Bank of England could signal that it will tighten monetary policy soon, which will offer further support to Sterling.

Core UK inflation, which excludes the price of food, alcohol, tobacco and other volatile items, also rose to 2.0% in the 12 months to May, much higher than expected. This suggests that businesses are raising their prices following the lockdown due to rising costs. Most of the increases in music downloads inflation (from -5.1% to +3.4%) games, and hobbies inflation (from -0.6% to +2.7%), will be reversed in June, according to analysts.

UK Inflation

With the UK economy slowly emerging from the Covid-19 lockdowns, the cost of fuel, clothing and eating out increased pushing inflation across the UK higher and over the Bank of England’s target for the first time in almost two years. The UK consumer price index jumped to 2.1% in May, which is the highest CPI reading since July 2019.

The Office for National Statistics said that transport was one of the biggest sectors who boosted inflation, as petrol prices rose significantly. Prices for clothing, games and recording media rose, while meals and drinks consumed out also helped to increase the cost of living. Food and non-alcoholic beverages’ prices fell this year, after rising a year ago.

The rise of core inflation to 2.0% in the 12 months to May has created some concerns that inflation could rise over the Bank of England’s 2% target for longer than expected. BoE’s chief economist Andy Haldane stressed that Britain was at a dangerous moment, with “some pretty punchy pressures on prices” and the risk that prices could begin “a game of leapfrog”, and possibly lead to a wage-price spiral.

Inflationary pressures building up

There are signs that inflationary pressures are building up in the economy, with UK producer prices rising as manufacturers increased prices by 4.6% year-on-year in May 2020, up from 4% in April. These prices could eventually be passed on to consumers.

Pricier metals and crude oil costs helped to push input costs higher, with copper hitting a record high in May, and oil reaching pre-pandemic highs. The ONS said: “Transport equipment, and metals and non-metallic minerals provided the largest upward contributions to the annual rates of output and input inflation respectively.”

As Yael Selfin, chief economist at KPMG UK said these pressures will ease next year, which means that the Bank of England will probably resist raising interest rates soon. She noted: “Short-term inflationary pressures brought about by a perfect storm of rising oil prices, supply chain misalignments as the global economy reopens and border frictions with the EU, saw UK inflation rise to 2.1% in May, above the Bank of England’s target level of 2%. Changes to VAT will push inflation further this year, although we expect it to average 1.9% this year and 2.2% in 2022. There is a greater level of uncertainty about prices at present, with a possibility that inflation will turn out to be higher if staff shortages persist, triggering stronger wage rises, while cost increases continue to be passed on to consumers. However, with price pressures expected to ease next year and inflation to stabilise around 2%, it is likely that the Bank of England will hold fire and not raise interest rates before 2023.”

For those watching currency markets, the inflation numbers merely confirm that the UK economy is slowly improving, and this should be positive news for the pound as it will remain in demand.

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The pound has recovered some of its earlier losses, following the release of the UK Consumer Prices Index. Rising in line with market expectations, inflation increased 0.6% month-on-month in April, as the rise in the prices of petrol, gas and electricity pushed the cost of living higher.  

The Office for National Statistics released on Wednesday figures that showed the Consumer Prices Index (CPI) rose by 1.5% in the 12 months to April 2021, making it the highest reading since last March.

The rise in inflation was driven by rising household utility bills, higher motor fuel prices and clothing. The ONS said: “Price movements for household utilities, clothing, and motor fuels are the main reasons for the higher monthly rate this year than a year ago.”

Food prices also rose in April driven by increased prices for chocolate, ice cream, breads and cereals. The ONS noted that: “Food prices rose by 0.9% between March and April 2021 but were little changed between the same two months in 2020. Prices for a variety of bread and cereal items rose this year but fell a year ago, resulting in an upward contribution of 0.04 percentage points. There was a similar upward contribution from across a range of sugar, jam, syrups, chocolate and confectionery items, with standout movements coming from large bars of chocolate and chocolate covered ice-cream bars. Prices for these items rose between March and April 2021 but were being discounted between the same two months in 2020.”

The Bank of England’s target is for inflation is 2% in the medium term, and analysts expect inflation to continue to rise in the next few months, as the economy improves and recovers from the pandemic. A stronger pound will help inflation as the cost of imports will fall.

Will rise in inflation be short-lived?

Ruth Gregory, senior UK economist at Capital Economics, believes that April’s rise in inflation will be short-lived: “There were pockets of inflation in those sectors that are reopening, with clothing inflation bouncing back from -3.5% to +0.5%, as retailers continued to reverse the aggressive discounting during lockdowns, and furniture inflation rising from 4.5% to 5.8%.… But in April, these movements were partially offset by some of the pandemic-induced surges in inflation continuing to fade. Data processing equipment fell further from 5.9% in March to 0.2%. Meanwhile, second-hand car inflation dropped from 1.2% to 0.2%.”

Factory gate inflation rose by 3.9%

The rise in commodity prices, drove UK manufacturers to increase their prices in April. The cost of goods after they leave the factory (factory gate prices) rose 3.9% in the 12 months to April 2021. Producer prices rose 0.4% during the month, something that could eventually affect consumers in the shops. Metal, crude oil and mineral prices also rose affecting manufacturers with higher input prices, which jumped by 9.9% compared to April 2020.

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The pound has risen to its highest level against the US dollar in almost three months. With the dollar weakening, Sterling rose to its highest level since 24th February, supported by jobs data that showed a drop in the UK unemployment rate, to 4.8%, and increase in employment. The stronger than expected jobs report and the weaker dollar help boost the pound.

UK Employment Rises

Employment data from the UK showed a rise in employment with 84,000 gaining jobs in April following the reopening of the economy and the loosening of lockdown measures. The labour market is characterised by high-skilled workers furloughed or made redundant pandemic or low-skilled workers unable to gain new employment. Employers began hiring again in March, which helped to reduce unemployment for a third consecutive month. The number of workers seeking employment fell to 1.6 million in the three months to March, compared with 1.7 million in the three months to February, the Office for National Statistics said. The quarterly rate was down to 4.8% from 4.9% in February.

The number of employees on company payrolls continued to rise but remained 772,000 below pre-pandemic levels. The number of job vacancies also continued to rise into April, with most industries showing signs of growth.

Jobless rate to Rise in Autumn

However, ING expect the jobless rate to rise at around 6% in the autumn, as the furlough scheme comes to an end September. James Smith from ING stated: “We can already see signs of a rapid turnaround in the hospitality sector over recent weeks, where online job adverts have returned quickly to pre-virus levels since the reopening road-map was announced.

While this is a ‘flow’ measure and clearly isn’t the same as saying employment has returned to where it was before the pandemic, it does suggest some of the past employment losses we’ve seen over recent months could be quickly reversed over coming months.”

Thomas Pugh of Capital Economics also said that the unemployment rate may rise to around 6.0% by the start of 2022 but should fall eventually: “The unemployment rate may still rise over the rest of this year. But this will probably be due to people re-joining the labour market rather than more people losing their jobs. Of course, this is all dependent on the path of the pandemic, and whether the UK is able to exit the crisis - or if new variants force new restrictions to be imposed.”

Employment Data is welcome news

The jobs data was welcomed by the Minister for Employment Mims Davies MP who said that the report shows how resilient the jobs market has been. He said: “A continued fall in unemployment, a further rise in vacancies, and growth in the employment rate is welcome news as we continue on our roadmap to recovery. While there is more to do to make sure we support jobseekers over the coming months, these figures highlight the resilience of our jobs market and ability for employers to adapt – and through our Plan for Jobs we’re continuing to create new opportunities for people right across the country.”

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