UK unemployment rate likely to fall further

The improvement in UK labour market eased off in Q2. Employment declined for the first time since Q1 2013 and the unemployment rate in Q2 rose to 5.6% from 5.5% in Q1. This is not expected to be the beginning of a new trend and employment is likely to pick up in the coming quarters as the growth outlook still remains solid although the pace will probably be slower than in previous quarters. 

"As the labour force is not expected to expand as rapidly, growth in employment should lower the number of unemployed persons and thus the unemployment rate. The unemployment rate is likely to decline to 5.2% in Q4 2016 which is below the BoE's estimated mediumterm equilibrium rate of around 5.5%", says Danske Bank. 

Wage growth has already picked up this year and is now at the highest level since the financial crisis. Wage growth is likely to pick up further as unemployment crawls below the NAIRU. This view is supported by our wage growth indicator which still indicates increasing wage growth.