Unemployment in UK more Likely to hit 3 million than 2

Posted on: 15.07.2010    16:46:19

The outlook for UK unemployment is grim.

Large public sector redundancies are expected as the Government sets about cutting departmental budgets by between 25 and 40 per cent by the end of the Parliament. The Office for Budget responsibility has estimated that this fiscal squeeze is going to cost around 490,000 public sector jobs. Let’s hope they deal with the “sickies” culture as part of the stable cleansing.

Public sector employers and unions should learn from the experience of the private sector in managing reduced budgets. Flexible working, reduced hours and, of course, wage restraint will help cushion the blow. But realism is necessary. A significant rise in jobless is inevitable, even if the Government and the public service unions work together in complete harmony in the coming months and years. This, in itself, is an unlikely event.

The maintenance of labour by firms in the recession will cramp job creation in the recovery. As orders return, firms will not need to hire to meet demand. Economists are already talking about a “jobless recovery”.

What makes the situation still more ominous is that the Government has taken a huge punt on job creation by the private sector over the coming years without much to back it up. The OBR has forecast that more private sector jobs will be created in the coming years, as confidence returns, than were created in the boom years of the past decade.

Why?

Where is the logic? – with the cuts to public spending being unprecedented, a drop in incomes in real terms, belt tightening all round leading to lower demand it is hard to believe the private sector recovery will be anywhere near as strong as forecast.

That said we need to hope that this optimistic forecast is correct because otherwise Britain’s unemployment is more likely to hit 3 million than 2 million in the next year.
The British economy faces a triple whammy of higher inflation, lower growth and rising unemployment, according to one of the Bank of England’s most senior policy makers. Living standards over the next few years will rise only “minimally” or put another way could fall in real terms.

Also ‘quantitative easing’ – the Bank of England’s way of force-feeding money into the economy – is again at the centre of the Monetary Policy Committee minutes. We hope this is for academic completeness rather than a serious suggestion to start the printing presses again.

Andrew Sentance may continue to win headlines for his obduracy on interest rates, thinking they should rise to head off inflation, but the debate is moving on.

The combination of a soft American economy, Europe’s fiscal squeeze and Britain’s lending drought suggests that the UK economy faces rough times ahead, with a real drop in spending power.

There is worse to come with the fiscal squeeze starting to bite, real incomes under pressure and house prices, the primeval force in the UK economy, starting to flag badly.

So we could see:

Increasing interest rates to try to curb inflation
A House price drop of 15-20% in the next 12 months
Sharply increasing unemployment
Reduced expenditure, therefore lower demand leading to a double dip recession.

Tomorrow the results of the stress tests on 91 European banks will be released. If they all pass the wrong questions have been asked. If a number fail then tighten your belt, hang on to your hat we are on an economic rollercoaster and equities could fall sharply.

Author: Chris Slay

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