How worrying is low job growth?

Labour market strength has been one of the pillars of the extraordinary resilience of private consumption post-Covid. This is most evident in the US, where consumption data surprised to the upside time and time again over the last couple of years, but it is also true in most countries around the world. Unemployment rates have increased from multi-decade lows, but broadly speaking they remain well under control.

With indicators such as non-farm payrolls growth in the US stalling, and the PAYE equivalent in the UK showing negative payroll growth for the best part of 2025, some alarms have gone off. Demand for labour has undoubtedly weakened globally as central banks have battled inflation with higher interest rates, but there have also been interesting developments in migration that investors will need to keep in mind going forward.

Post-Covid, net immigration reached extremely elevated levels in developed countries. This was partly due to some pent-up demand because of travel restrictions, but importantly it also coincided with several geopolitical conflicts around the world. According to the United Nations, in 2019 there were 78m people forcibly displaced worldwide, of which 33.6m were forced to move away from their countries (the rest being displaced within their countries of origin). By 2024 the number had risen to 123m, with 51m displaced to other countries. In 2015 the total was 65m, which goes to show how steep the increase has been in the last five years.

Now though that trend is reversing. If we take the UK as an example, Office for National Statistics (ONS) data shows that while net migration remains elevated compared to recent history, the number has more than halved from its peak (see Exhibit 1). Official data for the US is published annually, with the latest number at an all-time high of 2.8m for 2024. Estimates from various sources suggest numbers are already coming down materially in 2025, with the Pew Research Centre putting net international migration at negative 1.4m. A paper by the Federal Reserve Bank of San Francisco claimed that the tide began to turn in late 2024. There are idiosyncratic factors in every country that partly explain the decline in migration flows, but broadly the common theme is that governments have clamped down on migration due to the sharp increase in recent years becoming a more significant issue for voters.

From a labour market point of view, the developments of the last few years translate into a large increase in labour supply that is now reversing.

For investors, this matters because it lowers the level of job creation needed to keep the unemployment rate constant. For example, if the labour supply does not change in a given period then the economy does not need to create new jobs to keep the unemployment rate unchanged. In this context, a US non-farm payrolls print that is close to zero might not necessarily be as catastrophic as it has been in the past. We would emphasise here that there are signs of weakening labour demand beyond the net migration trend, so the situation needs to be watched carefully. But this is one explanation as to why the recent weakness in non-farm payrolls has not been replicated in other data such as the JOLTS survey.

Central banks do not have a target of job creation. In fact, most of them consider labour markets developments insofar as they impact inflation and inflation expectations. But even those that do have some labour market objective, such as the US Federal Reserve (Fed), consider a wide array of labour market data to form an opinion of underlying trends. Non-farm payrolls are without a doubt an important indicator, but they are not the only one. Given recent developments in migration trends, we might be in for a period of low job creation that does not spark a meaningful rise in unemployment.

This creates a situation where the economy is slowing down but remains far from recession, despite job data such as non-farm payrolls potentially looking rather weak from month to month. Default rates should remain under control in this scenario, which means credit should continue performing well, albeit the scope for further spread compression is limited. As for government bond yields, the latest rally has left implied terminal rate expectations for the US clearly below the 3% mark. This seems somewhat excessive in our opinion, as market growth projections for 2025 have been revised upwards in the last couple of months given a little more clarity has emerged around tariffs. A sustained rally in rates from current levels only seems feasible if economic activity slows down dramatically from here.