Thursday, 19 November 2009

Touching The Bottom?

The October UK unemployment figures were released recently (see report). The encouraging news is that the rate of growth in unemployment has slowed dramatically this month – an increase of only 12,900 in October, against an increase of 20,800 in September – to bring the total unemployed to 2.46 million. Of course, each one of those people who are unemployed represents a tragedy in itself, but, compared to the doom and gloom earlier in the year, this is quite a good recession.

For the benefit of those who have joined this list over the summer, perhaps we should give some background? At the start of the year, the conventional wisdom held that UK unemployment would hit 3 million by the end of this year. This sounded like an exaggeration to us – a case of dystopian forecasting mixed with a bit of political Schadenfreude (see original post). By the beginning of this year, we were comfortable with the view that unemployment would hit about 2.5 million by the end of this year, placing us quite at variance with the conventional wisdom.

Why does this matter? We originally came to this subject when we were calculating the size of the post-credit crunch PSBR and when we started to estimate the length of time that it would take for the UK Government to unwind its position. In our original calculations, we felt that the PSBR could be unwound by 2017 (see post). However, that view was based on the assumption of a relatively mild recession with unemployment peaking at 2.25 million. As it became evident that the recession would be anything but mild, we revised our assumption about unemployment to 2.5 million by the end of 2009, peaking a little higher in the first half of 2010.

One of the curious features of the present recession is that there has been very little impact on the unemployment figures. In the UK, GDP has fallen by about 5.9% (subject to revision), but unemployment has only increased by about 30%. In the US, a similar GDP fall has led to the doubling of unemployment. There is evidence to suggest that UK companies are hoarding labour – it will cost a great deal to re-skill a newly employed workforce on the upturn, so companies are working short-time in order to conserve their skill base. We also have to acknowledge the impact of government schemes to protect employment have also slowed the rate at which jobs have been lost.

This will have a great bearing upon the future. To start with, the recovery is likely to be relatively jobless as companies simply meet increasing demand for their goods and services by using their existing workforce more efficiently. However, the more significant impact will be upon the PSBR. As fewer workers have been laid off, unemployment payments have not risen as much as it was feared that they might and tax revenues have not fallen quite as far as they otherwise would. In terms of our previous estimates, it is still likely that the UK government will be able to unbundle its position by the end of the next decade.

If so, then this would imply that the proposed downgrading of UK sovereign debt by Fitch might be a little bit premature (see story). It is quite clear that the Pound is being allowed to fall because the inflationary pressures are quite muted and UK companies are enjoying the benefits of easy sales in foreign markets – particularly those tied to the US Dollar (North America and the Far East) and the Euro (Euroland and Eastern Europe).

At present, we are quite upbeat about the UK prospects for the next decade, and it is this context that the good news about the October unemployment figures are served.

The issues covered in this post are dealt with at greater length in our forthcoming book “The Age Of Scarcity 2010-50”.


Hervé Musseau said...

There is also the fact that some workers that got laid off were from Eastern Europe (notably Poland), and went back home rather than remain unemployed in the UK.

Stephen Aguilar-Millan said...

Yes, it's an interesting decision - to stay or to return. Those returners who we have interviewed tend to suggest that it is due to a lower cost of being unemployed in Warsaw than in London.

More tellingly, many state that they would have returned anyway, with the recession influencing the timing of their return rather than forcing them home anyway.

Research from the Tomorrow Project suggests that up to two thirds of the UK migrant workers intended to return home when they originally came to the UK. To me, this gives support to the EU 'Blue Card' system of guest workers.