February unemployment to top 3 million mark

Unemployment is this week set to shatter the politically explosive 3 million mark for the first time in six years, increasing pressure on the Government for another cut in bank base rates.

City analysts expect the jobless total to rise by 40,000 in February, after adjusting for normal seasonal changes. This would be less than the 60,800 surge the previous month, but would take the national unemployment figure to 3,014,000.

A conflicting picture for the real economy is expected from figures for high street spending and factory output - suggesting that the economy may be on the turn.

City forecasts are for a 0.5 per cent increase in high-street sales volumes in January, and some analysts hope the 0.7 per cent December fall will be revised to show a smaller decline.

Manufacturing output is meanwhile expected to have steadied in December, after a 0.5 per cent decline in the previous month. Including North Sea oil and gas production, overall industrial production, is expected to be up by 0.3 per cent on the month.

Reflecting the effect of the recession in depressing tax revenues and increasing spending on benefits, the public sector borrowing requirement for January - normally a buoyant month for receipts - is forecast at pounds 900m, temporarily down from the pounds 3.4bn deficit in December. Analysts fear the Government may have to borrow pounds 47.5bn in the next financial year, starting in April.

An unexpectedly large rise in unemployment could put severe pressure on the Prime Minister to cut interest rates again, as last month.

Friday's unexpectedly dramatic fall in inflation to a 25-year low of 1.7 per cent is seen by the financial markets as removing an important obstacle to lower rates, although the Chancellor of the Exchequer and the incoming Governor of the Bank of England insisted on Friday there was no need to cut rates again for the time being.

Both developments could put pressure on the pound again. On Friday, it recovered from a record trading low to end at 76.2 per cent of its 1985 value against a basket of other currencies.

Analysts fear another cut in base rates could take the pound down below DM2.30 for the first time. Bill Martin, of UBS Phillips & Drew, says that in the long run the pound will fall to parity with the dollar. On Friday it closed at dollars 1.4187, barely changed on the day.