Fall in jobless points to 'golden scenario'

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The Independent Online

Economics Correspondent

A sharp fall in unemployment last month combined with better inflation prospects means the economy faces a "golden scenario" this year, City economists said yesterday.

The number of people claiming unemployment benefit fell for the 29th month running in January. The monthly decline of 29,300, to a level just above 2.2 million, was the biggest since the end of 1994. The unemployment rate fell to 7.9 per cent, the first time in nearly five yers it has fallen below 8 per cent.

The scale of the fall came as a surprise after a marked slowdown in the pace of decline in recent months. The biggest declines in the unemployment count were in the South-east, followed by the West Midlands and North- west.

In another sign of buoyancy, employment in manufacturing industry rose by 5,000 in December. The 28,000 increase in manufacturing jobs in the final quarter of last year was the biggest on record. Overtime in manufacturing was at its highest for five years.

Yet despite this the growth in underlying average earnings was unchanged at 3.25 per cent in December, suggesting that lower unemployment is putting little or no upward pressure on pay.

Many economists put a very optimistic gloss on the figures, saying labour market deregulation had reduced the rate below which further falls in unemployment trigger rising wage inflation - or the "natural" rate of unemployment.

In its Inflation Report yesterday the Bank of England concluded that this explained why wage increases have remained so low. It forecasts only a modest rise in earnings growth during the next two years.

However, many economists pointed out that yesterday's figures contained some puzzles. "The size of the drop in unemployment is hard to square with other signs," said Michael Saunders at Salomon Brothers.

Manufacturing output was flat in the final quarter of the year, making it hard to understand the record job creation. One possible explanation is that firms believe the slowdown in growth will be temporary. "Sooner or later either output will recover or manufacturers will start to shed jobs," said Adam Cole at brokers James Capel.

Michael Meacher, the Labour Party's employment spokesman, drew attention to figures showing that the number of vacancies at JobCentres had fallen for the second month running in January, while the number of redundancies was 210,000 in June-August, 16,000 up on a year earlier.

Mr Meacher said: "This month's fall in unemployment cannot disguise the fact that the performance of the British economy is still weak."

Mervyn King, the Bank of England's chief economist, said that in the short term there was a risk of further economic slowdown, which would tend to make inflation lower. However, at the two-year horizon - the one relevant to the Bank's policy advice - the possibility of faster growth meant there was a danger of higher inflation.

The report issued a mild warning about the pace of broad money growth. "It is likely that M4 is signalling higher planned spending in the future, although it is too soon to tell whether recent growth rates of broad money will persist," it said.

Mr King added a note of caution: "Inflation is not dead. Inflation is a process and requires the consistent application of monetary policy."

For the first time the Bank published a range for inflation with probabilities attached to the different possible rates. It said the most probable outcome was inflation just under 2.5 per cent by the beginning of 1998, but higher or lower rates were possible. The presentation is designed to allow the Bank to illustrate its judgements about the balance of inflationary risks.

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