The UK economy, at least unemployment is improving

 Before I move on from the excitement over Greece I would just like to point out that her ten-year government bond yields closed last night at 6.18% which is 3.06% over that of Germany’s equivalent bund. Considering the drama of the announcement from EU ministers and the fact that Standard and Poors took Greece off a long-term credit watch negative  one might have expected more. However I dealt with the non-event which was the EU plan yesterday and the Standard and Poors statement was an odd kettle of fish as what it said rather contradicted what it did! One part of their statement was entirely as readers of my articles would expect as it was responding to Greece’s new austerity plan in other words it was acting reactively not proactively. You know my views on ratings agencies and their usefulness. However I will quote a sentence from the report as an illustration of it.

In light of these considerable budgetary challenges and the difficult economic environment, it remains to be seen whether Greece’s leaders will demonstrate the political will necessary to achieve fiscal consolidation

Hardly a ringing endorsement….

The UK

Whilst Greece has been dominating much of the news there have been developments in the UK economic situation which have implications for us going forwards. Some of it has been outright news and some of it has been analysis which is frankly rather disturbing.


The National Institute for Economic and Social Research published last week it estimate for growth for the quarter ending in February 2010 which was 0.3%. However tucked away in the report were some further significant details. For example growth has been estimated to be 0.7% of GDP since the trough of the recession in September 2009. I have written many times about conventional economics failing us and here is another example as I remember many economists predicting that the severe recession we have been through would mean that the recovery would be very strong. However looking at past recessions there is a further clue because for example at this time into them (24 months) we started to see GDP growth pick up in 1979/83,1973/76 and 1990/93. The one exception to this was 1930/34 and I do not need to tell you what happened there but will just make one point the double-dip which was evident in the 30s depression started now.

The recent disappointing balance of payments numbers for January will not help our growth figures but one months figures for this measure are unreliable (albeit they are part of a disappointing trend). Poor industrial and manufacturing figures fit into this picture too.


Our most recent Producer Price inflation figures were disappointing as they showed signs of further inflation in our economic system. Just as a reminder the output price index rose by 4.1% in February compared with 3.8% in January 2010 and the input price index rose by 6.9% in February which compares with 7.7% in January 2010. Our exchange rate has continued its  decline on a trade weighted basis although there have been occasional daily rallies like yesterday but the trend is still down which leads to the danger of “imported inflation”

An example of this has been the recent AA report that fuel prices at the pump are predicted to soon hit £1.20 per litre. This is partly due to imported inflation (wholesale fuel costs have risen by 17% over the last month) and partly due to the institutionalisation of inflation in the UK where there will be a 3 pence rise in fuel duty on the 1st April. As a comparison the AA figures show that diesel was approximately £1 per litre and petrol approximately 92 pence per litre a year ago.

Bank of England Monetary Policy

Tucked away in a report by the Financial Services Authority last week were some interesting numbers of which Deutsche Bank thinks

It also confirms our concerns around the UK’s increasing gearing to floating interest rates and potential under-reserving for fragile borrowers given how cheaply existing mortgages can be serviced while interest rates are this low. Households are currently benefiting from ~£100bn p.a. reduction in mortgage servicing costs (so why is deposit growth so low?), but with the economy becoming increasingly geared to low-interest rates as the proportion of floating rate debt continues to dramatically increase.

There are two clear implications of this.

1. One would expect rises in interest rates to act very strongly on the UK economy as the proportion of variable rate mortgage debt is rising. I am sure the Monetary Policy Committee is looking at this and there are clear implications for when and how they will raise rates.

2. Whilst there has been an enormous benefit from the cuts in interest rates particularly to holders of variable-rate mortgages those in potential trouble do not seem to have used to opportunity to pay down debt. 

In other words a rise in interest rates in the UK is likely to have a strong effect because of the prevalence of variable rate mortgages and the size of household debt.


There is a fascinating asymmetry here. We had large cuts in interest rates of the order of 5% which hopefully helped our economic situation but now we may be very nervous of small rises. The impact one way appears much larger than the other which is a disturbing indication of the mess we are in. Savers may well reasonably feel hard done by as the clear implication is that interest rates did not need to be reduced so far and should have been combined with other measures as well as being made more calmly (in case you are wondering I did argue for this at the time).


Here is a measure which has performed better than expected throughout this recession and as it hits individuals hard this is nice to be able to say. Indeed today’s numbers appear on the face of them to be really rather good. The Office for National Statistics said the number of people claiming jobless benefit fell by 32,300 in February, as opposed to analysts predictions of a small rise. January’s rise, previously reported at 23,500, was reduced to 5,300. The claimant count rate eased to 4.9 percent, the lowest since August 2009. The unemployment rate has fallen by 0.1% to 7.8%.

Rather more disturbingly employment has fallen too. Again according to the Office for National Statistics the employment rate fell to 72.2% in the 3 months to January 2010  and has not been lower since November 1996. The number of people in employment fell by 54,000 on the quarter to 28.86 million. This was down 482,000 on a year earlier. 

For those considering the impact of the recession on the public-sector they may be intrigued by the fact that employment there is up by 7,000 on the quarter.


It would appear that our recovery from recession will be slower than past recessions might indicate and shows signs of being accompanied by higher inflation. The prevalence of variable rate mortgages compared to our international peers and the fact that the FSA found little evidence of those in potential financial difficulties paying down debt will make the Monetary Policy Committee likely to be even more cautious in raising interest rates. As there appears to be a clear asymmetry here compared with the knee-jerk savage cuts made by the MPC savers are right to wonder if this policy was misconceived.

In the topsy-turvy world of this recession comes falling unemployment combined with falling employment, which sounds like something you might have found in one of George Orwell’s books. I am pleased for those who have come off the claimant count but am worried by the implications of the trend for people to withdraw from the workforce and the fact that working hours have been falling as this is if you think about it a better measure of economic performance. In fact it would appear that employment is falling faster than unemployment and this is worrying.

I am intrigued by the estimate of the benefit of the cuts in interest rates to mortgage borrowers (£100 billion) and the fact that there does not appear to be a lot of evidence of this being used to repay debt. When you consider this and think of where we are now in terms of economic recovery my smile at the unemployment figures is in danger of turning into a frown.


7 thoughts on “The UK economy, at least unemployment is improving

  1. As you rightly observe in your blog today it seems, despite the recent claims by the BoE, MPC and supposed leading (Socialist) Economists that inflation would peak at CPI 3.5% and then quickly fall back below 2 %, that this will not be so. Most seasoned and analytic observers had already stated that inflation would now become a serious problem of course. It is hardly surprising if you have pumped £200 billion of Monopoly money into the economy, and held base rate significantly below declared inflation for so long, that serious rising inflation will be the result.

    The MPC is now stating that even it is concerned. See; but of course any concern which it may now have will be of no avail since it now has to obey the detailed instructions of Brown! He does not want interest rates to rise. It should of course have acted sooner when it was clear that inflation was not falling as they had anticipated, but I think their hands were already tied, and in any case they did not want to do what should have been done, for fear of increasing unemployment .

    It also seems that the BoE is now formally issuing preparatory statements acknowledging that inflation will now become a serious problem despite their previous careless and ill-considered statements that it would quickly fall back below 2 %. See “The Bank report said that one risk was that employees would be “unwilling to accept a further squeeze in real wage growth”, adding: “That could lead them to push for higher pay settlements this year. But if companies cannot afford the increase, then they may shed labour in order to contain labour costs.” ” They are clearly now frightened that in this scenario there will be increasing wage hike demands, and that this will lead to severe stagflation and possibly Depression. However they only have themselves to blame for all of this (and Brown). They have completely mis-managed the economy for only Political purposes.

    I sense that we are now going to have the painful Double Dip scenario and another Depression. It is now too late to avoid and all of the wrong actions have been taken solely for Socialist reasons. Economic problems and errors are like the largest mountains. You can attempt to avoid them, but they are always there; economic corrections too cannot be avoided. They may be delayed but not avoided.

  2. Brilliant blog, I really like your articles here, especially the way you go through data and facts carefully.

    Here’s my 50 cents on this; putting the pieces together in a simple reasoning based on the IS/LM model, conceptually, it appears that UK is in a process of wealth-loss to sort things out. Here are the steps;

    1) Overnight interest rates are unnaturally (compared to inflation) low
    2) Therefore money in the country has two flows; towards risky equity assets or outbound (gov. bonds are also risky as long-term inflation is unpredictable)
    3) This creates a continual loss of value in GBP – which in my opinion is intentional, as I recall Mr. King (of central bank) say at some point something in this direction.
    4) Surely, the idea is to make UK products more desirable and kick-off various industries’ outputs. However, UK already being a developed country, and the 3rd world getting lion’s share of GDP growth this isn’t likely to pick up anytime soon.
    5) Pre-crisis, a hefty proportion of GDP generation was via property and financial services which is another reason which explains why industry is slow to pick up – yet another something I recall -was it- Lord Mandelson say about gearing the economy too much towards these two industries in a meeting with Rolls & Royce in post-crisis aftermath.
    6) Punishing the debtors (mortgage owners) too harshly would create social unrest in the UK, especially being encouraged officially to act in this way (recall buy-to-let mortgages, boom-bust cycles disappearing, …), however the property prices are a balloon, therefore the only choice left to fall to reality is to let GBP fall.
    7) As for the employment figure, I recall a certain proportion of the population is likely to take up employment as a characteristic of a country (ref. some Economist article a while back). Now, the unemployment figure dropping are – I guess – those folks coming back into employment in lesser terms (again wealth loss).

    So overall, because of psychological and social reasons, dropping the nominal prices of homes is difficult (but happens a little), accepting drops in salaries or worse terms is hard (but happens a little), so what’s happening is the devaluation of the currency to come to terms with the reality, and starting the shift of economic focus towards different industries.

    All in all, of course this is pure speculation, but if anything the crisis showed a little intellectual speculation may be helpful after all rather than relying completely on established models.

    • Hi Burak

      I am pleased to see that you are thinking as there is so little of that around at times! It made me smile to think back to when I was learning about IS/LM curves so thanks for that. As to your points they do make sense, my thoughts would be.
      3. Is probably true but as I have written about has been a dangerous game for the UK in the past (and therefore probably future).
      5. I have heard Lord Mandelson say that but his government has been in power for 13 years and actively encouraged what turned out to be the wrong sectors. For a bit of light relief and gallows humour here is a quote for you from Gordon Brown in 2004.
      “Lehman Brothers is a great company today that can both look backwards with pride and look forward with hope. And in wishing Lehman Brothers the success it deserves for its future, let me thank you for the privilege of being here and formally declare this new building open”

      What you are missing so far in your analysis is a good dose of inflation to reduce the real value of the debt, I think then it all holds together.. I am afraid the shift to new industries is a good idea but is likely to turn out to be political hot air you may like to look up the National Enterprise Board for some past history!

      • Thanks for the reply, saw it today. I essentially agree with all your points.

        It was at best naive (or at worst criminal) to gear the economy this much on two inter-dependent sectors.

        I see Britain as best suited for a high-tech sector with all the good universities. Time will show I guess.

  3. To stop the bubble bursting we blew another bubble inside it of almost the same size.This time the crude weapon of ultra low interest rates with correspondingly low mortgage rates.

    Without wishing to torture the analogy too far we cannot deflate the ‘inner bubble’ in an orderly way as we need to pop the outer (original bubble) of lending to poor credit risk at the same time.

    So we hang on and do nothing until our creditors refuse to buy any more paper or the there is a complete loss of confidence in sterling. At some point we face a collapse that this time will leave us left out to dry.

  4. I think we have missed a significant point regarding domestic mortgages which may go some way to explain that DB statement. Who holds most of that paper now, HMG! Can anyone really imagine Brown allowing grand scale repossessions, especially just before an election? With a large percentage of the population skewered by huge levels of personal debt and by association just a minority who kept a proper fiscal balance which group has the money gone towards helping…….

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