New fears over the rising tide of jobless

A "double-dip" downturn could deter private hiring

In a week when ministers are bracing themselves for another steep rise in unemployment and possible downgrades in the Bank of England's growth forecasts, senior analysts at two organisations warn today that a huge "second wave" of public-sector redundancies threatens to extinguish any near-term economic recovery.

In their latest Labour Market Outlook, the Chartered Institute of Personnel and Development (CIPD) and accountants KPMG say that the pace of deterioration in UK job prospects is starting to slow this summer, as private-sector demand for staff begins to stabilise following the surge of redundancies that took effect earlier in the year.

However, signs of improved employer optimism in the private sector are being offset by mounting pessimism in the public sector. They also caution that there could be a further round of redundancies in the private sector if company profits "continue to be squeezed by fast-rising unit labour costs". Although pay rises are unusually subdued, falls in output have left labour costs per unit of output higher than during the boom.

And, despite the increasingly optimistic mood among managers in the private sector, the net balance of employers' responses to questions about plans to hire new staff is still negative. Overall, the CIPD survey finds a negative balance of -10 per cent between the proportion of employers expecting to employ more staff over the next three months against those saying they will employ fewer staff.

But the trend is moderately encouraging – there was a negative balance of -19 per cent in the spring poll.

John Philpott, chief economist at the CIPD, said: " Employment will keep falling and unemployment is still on course to top 3 million people during 2010. And it is far too soon to rule out another avalanche of private-sector redundancies later in the year." He added: "While pay restraint or cuts in hours of work has helped save many jobs that might otherwise have been lost during the recession, holding onto staff when order books are far from healthy pushes up unit labour costs and eats into company profits.

"This can't be sustained indefinitely – a weak economic recovery, let alone a double-dip recession, might well cause many employers to reassess current staffing levels before too long."

The private sector is experiencing the most marked improvement in sentiment as to future employment intentions. There, the negative balance is now -2 per cent, down from -30 per cent in the spring. The improvement is due mainly to a fall in expected redundancies. By contrast, in the public sector the negative balance has increased from -3 per cent to -28 per cent.

Amongst employers making redundancies, slighter workforce reductions of 4 per cent are expected in the three months following the survey, down from 6.5 per cent in the spring.

The research also found that the pay outlook has worsened, with only 15 per cent of respondents planning to carry out a pay review this quarter, less than half last quarter's 32 per cent. Employers' average pay increase expectations have dropped below the rate of inflation, to 1.7 per cent.

On Wednesday, the office for National Statistics will release its latest figures on the national unemployment scene. They are likely to show a further rise in the headline figure of unemployment, and economists' attention will focus on whether the rate of increase is starting to slow. Unemployment usually continues rising even after the economy has begun to recover, as wary employers can usually increase output without hiring staff.

The Bank of England also releases its latest Inflation Report on Wednesday, its definitive view on prospects for the economy. The growth forecast for 2009 is widely expected to be lowered.