Job figures show recession could return

by Ed Bowsher on 17 February 2010  |  2 comments
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Today's unexpectedly poor job numbers show that the threat of a double-dip recession is still real.

The number of people claiming jobseekers' allowance rose by 24,000 to 1.64 million in January. That's a worrying rise - especially since many economists had been expecting a slight fall. What's more, the number of people who said they had taken a part-time job because they couldn't find a full-time position rose by 3.7%. 

I should add that a different, wider measure of joblessness does show a fall of 3000 to 2.46 million, but the overall picture looks pretty gloomy to me. And, of course, if people are struggling to find jobs, that suggests that the economy is struggling as well. So don't expect to see much growth when we get GDP figures for the first quarter of 2010. 

However, I suspect that there is one small group of people who were secretly relieved to read today's unemployment stats. That's the boffins on the Bank of England's Monetary Policy Committee (MPC). The MPC has kept interest rates low for a year in an attempt to avoid deflation. The MPC's approach was risky because if they went too far, inflation could take off and soar towards 10% or higher. 

But today's job numbers confirm that the economy is sluggish and you wouldn't normally expect inflation to take off in these circumstances. So I'm not especially worried about inflation, but I am very concerned about prospects for the UK economy over the next couple of years. In particular, I'm worried about the following factors: 

• Government expenditure cutbacks which are inevitable going forward. These cuts will cramp economic growth.
• The government's poor finances could lead to a debt downgrade for UK gilts. In other words, the markets might start to worry that the UK government couldn't service its debts. As a result, the government would have to pay higher rates of interest on its debt to compensate for the risk. That would drive up interest rates across the UK economy and cramp growth. The worst case scenario is a Greek-style crisis.
• Mortgage credit could get tighter once the Bank of England ends its Special Liquidity Scheme (SLS.) The SLS has given the banks access to cheap money to facilitate mortgage lending.  

So, as I've said before, I'm much more worried about the threat of the UK going back into recession rather than inflation heading over 5%. Sadly, the chances of a double-dip recession are rising by the day.

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