Cracks starting to show as pressure on labour market mounts

UNEMPLOYMENT remains near record lows but cracks are starting to appear in the UK labour market as surging energy, food and rental costs come to bear on the economy.

The rate of growth in Scotland’s workforce is still increasing but has slowed to levels not seen since April of last year, while the manufacturing sector is showing the first reduction in numbers employed since early 2021. Anecdotal evidence suggests increased caution among employers on hiring plans as the economy slides into a downturn over the winter.

For large-scale recruitment to resume we need to see an easing in inflationary pressures along with evidence that the recession will be shorter and shallower than currently predicted by the Bank of England. A key for sustaining growth is consumer confidence, which is currently being battered by various economic forces.

Consumer finances are under strain from unprecedented increases in fuel costs with 35 per cent of households in Scotland now in fuel poverty, up from 27% a year earlier and 25% in 2019. For those in local authority and housing association homes fuel poverty rates are now above 50% despite government action to alleviate this.

Poorer households on pre-payment meters are particularly impacted by rising energy bills, with 80% of gas use occurring in the winter months. This is particularly stressful because unlike direct debit customers, those on pre-payment meters are unable to spread these costs over the entire year.

Food inflation is also running high at 15% compared to 20% for energy, but a further squeeze on household finances that doesn’t receive as much attention as it should is the level of rental charges in the private sector.

The rise of 3.7% in private sector rents in July in Scotland was the largest monthly increase since records began in 2012 and continued at elevated levels before the temporary freeze implemented by the Scottish Government in October. Renters are also far more likely to be on pre-payment meters, which account for 22% of the private rental sector but just 6% of owner-occupied homes.

To alleviate this workers are struggling to increase their wages across virtually all industries, with those in unionised sectors of the economy taking industrial action as wages are falling far short of keeping pace with inflation.

Theses pressures are unlikely to diminish soon, with latest projections by the Scottish Fiscal Commission showing that real earnings will decline by 2.7% in the coming year. As households try to recover rising costs they will either have to use savings – though 40% of households have so savings whatsoever – or they will have to keep cutting back on consumption.

The latter will be an obvious drag on company revenues, with the Office for National Statistics reporting that the greatest fall in UK vacancies has been across the hospitality, retailing and wholesaling sectors.

Overall vacancy levels are still high by historical standards, but the outlook is far less positive. Amid widespread expectations that unemployment is set to rise, it’s crucial that policymakers start working now on how to help consumers and firms through the difficult months ahead.