Economics: Jobless rise makes case for rate cut

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The Independent Online
IF THE Chancellor was still thinking of raising taxes in the Budget on 16 March, he should tear up his plans. The latest batch of indicators for retail sales, manufacturing output, job losses and unemployment are awful.

Moreover, our European markets are dipping even more rapidly. The case for another interest rate cut must surely now be compelling.

Last week's labour market figures were particularly alarming. The 60,800 rise in unemployment in December (after allowing for seasonal factors) was the sharpest for 18 months and followed a long period when at least the Government could claim that things were getting worse more slowly. Unemployment will probably breach 3 million in January.

Unemployment, of course, reflects activity in the economy after a time lag of about six months. But almost all the forward-looking labour market indicators are also drear, with the exception of vacancies, which staged a small rally.

Short-time working is up. Overtime is down. These are not the signs of businesses which are gearing up to expand output.

Worst of all are the figures for employment. These are produced after an even longer delay than the unemployment figures, and so receive little press or political attention.

But they should. They show that the jobs in the economy plummeted by 382,000 in the third quarter - a decline of 1.75 per cent in just three months.

This is horrible. The worst previous decline in the number of employees in any quarter of this recession was 221,000, so these figures represent a collapse of almost double the previous record. The shake-out in manufacturing of 128,000 jobs was also bigger than the previous peak of 104,000 when output was dropping sharply in the first quarter of 1990.

These job losses will not necessarily be matched by an equal rise in unemployment. The main reason for any difference is simply that many people who become unemployed are not entitled to benefits (because, for example, their spouse is still in well- paid work). They are therefore not counted in the official unemployment figures based on benefit claimants. But the jobs shake-out in the third quarter will probably work through to sharp increases in unemployment in the first part of this year.

The employment figures are also consistent with the story told in this column since last summer, namely that output had been running ahead of what businesses could sell, and that companies would deal with the gap by cutting production and jobs. Manufacturing output dropped relatively little in the early autumn, but the fall accelerated to a half per cent in November. The three month on three month comparison, more reliable than the month on month change, is also down a half per cent.

Businesses may have continued to retrench in December. Stocks of unsold goods are still higher than companies want, and the outlook in foreign markets is becoming bleaker by the day. Every major European country is now in recession, even if its government does not admit it. Last week's figures showed that French industrial production fell by 4.5 per cent in December alone, and is now 3.8 per cent below the level of a year earlier. German industrial production fell by 5.2 per cent over the year to November, and orders are down nearly 10 per cent. Italian production is down 5.1 per cent over the year to October.

If Britain's consumers give up too, the economy is almost bound to relapse. Nevertheless, it is too early to become alarmed by the other piece of bad news last week: the 0.7 per cent fall in retail sales volume in December, a drop which was in marked contrast to the bullish reports from the stores themselves. The figures are meant to allow for the seasonal surge in Christmas sales, but that always involves some heroic guesswork. The Retail Consortium believes that year-on-year sales volume was up about 2 per cent against the CSO's estimated 1.2 per cent.

A clue that the Retail Consortium may be right comes from the figures for M0 (notes and coin in circulation and bankers' cash at the Bank of England). Part of the recent rise in cash will probably reflect the consequences of lower interest rates: people no longer have as much incentive to economise on their holdings of notes and coin, and to build up interest-bearing bank accounts instead. But the rise in cash now appears to be so strong that it probably reflects higher retail spending, too.

Retail sales account for just 40 per cent of consumer spending, which adds items like cars and restaurant meals. Much of the recent retail rise has been at the expense of items in the wider total, as people traded down during hard times. But there is better news here, too: consumer spending rose by 0.4 per cent in the third quarter after a small rise in the second. Although most of the sharp rise in car sales is replacement fleet buying (which counts as company investment), consumer spending is also benefiting.

The danger is that people are so frightened by the labour market melt-down that consumer spending could stall or even go into reverse. The jobs shake-out is probably why consumer confidence has not responded more readily to the cuts in interest rates. A recent poll for the TUC found that 45 per cent of people thought jobs were at risk in their own workplace; 15 per cent thought their own jobs were on the line.

The two other ghosts of this recession are also rattling their chains. Debt levels are still high, so that people prefer to repay borrowing rather than spend. And the evidence for the much-vaunted turnaround in the housing market is slim. In this context, it is hard to see what the Chancellor has to lose by cutting interest rates again.

He should also be thinking hard about what he can do to support activity in the Budget. Although it would be a mistake to introduce any overall rise in taxes, there are changes within the tax structure which could help to support the economy. The most important single target must be house prices.

Falling house prices discourage first-time buyers, who rightly see that they might lose the value of their deposit if prices continue to drop. As a result, chains cannot begin. Other people cannot move and transactions languish at low levels, depressing all those areas of spending like furniture which go with moving house. Falling prices also reduce people's net wealth, and make them more reluctant to incur debt or start spending. Turning the housing market is the key to turning the recession.

The Chancellor could give more money to housing associations to buy up homes for social rent, but the key must be to encourage first-time buyers back to the market. His best option would be to provide rolled-up mortgage tax relief for the first-time buyers while reducing tax relief for the rest, a reform which would hardly be noticed by most home-owners when interest rates have fallen so sharply. The Chancellor should also state that the rolled-up relief would end entirely as soon as the market revives, thus providing an incentive to buy quickly.

The economy is precariously balanced. It could swing back into deeper recession, or it could revive more rapidly than many expect. The objective of the Budget should be to make sure it moves in the right direction.

(Graphs omitted)

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