Employment is at record levels. Firms are struggling to hire workers. Pay growth is back to levels last seen before the financial crisis of a decade ago. So what does the Bank of England do?

In normal circumstances, it would be a no-brainer. Some members of Threadneedle Street’s monetary policy committee would already be voting for an increase in borrowing costs and the City would be assuming action from the Bank in February. After all, at 0.75%, official rates are extremely low by historic standards.

These, though, are far from normal circumstances. The government’s inept handling of the Brexit negotiations, culminating in this week’s decision to chicken out of a parliamentary vote on the prime minister’s withdrawal agreement, is affecting investment, confidence and the housing market.

Against this backdrop, the strength of the labour market is surprising. Sure, there was a 20,000 rise in the jobless total in the three months ending in October, but only because the number of people joining the workforce exceeded the number of new jobs. Employment was up by almost 80,000 and the employment rate of 75.7% has not been higher since modern records began.

Strong employment growth has been a feature of the post-financial crisis economy. What’s different now is that higher employment is starting to translate into higher wage growth. An above-inflation increase in the national minimum wage, a 3% wage deal for NHS workers and the biggest annual fall in the number of EU nationals working in the UK in more than two decades have all contributed to an annual increase of 3.3% in both total and regular pay. Consumer spending power is being boosted.

Yet, the robust health of the labour market is in contrast to the rest of the economy, which has cooled as Brexit uncertainty has increased. Employment and unemployment are often seen as lagging indicators because they tell us more about what was happening in the past than they do about what is going to happen in the future.

And it’s clear that the next few months are not going to be easy. Brexit uncertainty is going to persist and will affect activity in both the final three months of 2018 and the first three months of 2019. The Bank will only start to fret about the need to raise rates if pay growth accelerates further. And, as things stand, that looks unlikely.

Abject surrender

Emmanuel Macron has bowed to the inevitable. For weeks, it has been obvious that there would be only one winner in the battle between the French state and the gilets jaunes protestors, and that sooner or later Macron would abandon his Thatcherite “this president’s not for turning” stance.

When it came, the surrender was abject. Macron has raised the minimum wage, made overtime tax-free and exempted those earning less than €2,000 a month from higher pension contributions. That’s on top of the decision to put a six-month freeze on the fuel duties that sparked the protests in the first place. This won’t do much for Macron’s reputation as the man to transform the French economy – as he likes to style it – but it should eventually be enough to buy off all but the most determined gilets jaunes, and will improve growth next year to boot.

Intriguingly, the concessions put Paris on a collision course with the European commission. That’s because the €10bn cost of the changes – unless they are offset by tax increases or spending cuts elsewhere – will push France’s budget deficit up from 2.8% to 3.2%, above the 3% ceiling permitted by the euro zone’s stability and growth pact.

The populist government in Italy – which already faces disciplinary action from Brussels over its budget – was quick to exploit the opportunity. Its deputy prime minister, Luigi Di Maio, said if deficit rules applied to Italy then they had to apply to France as well. That’s a fair point.