Wasteland: Europe stalked by spectre of mass unemployment

Rise in UK claimants prompts calls for rethink in austerity plans

The UK's fragile economic recovery was exposed yesterday by disappointing employment figures and an unexpected rise in the number of people claiming unemployment benefits.

The claimant count, which measures the number of people claiming jobseekers' allowance, increased by 2,300 in August, the first rise since December last year, according to figures released by the Office for National Statistics. The jump confounded City forecasts, which had pointed to further declines – and will alarm policy makers, coming as it does in the wake of this week's IMF warning that Europe risks becoming an employment "wasteland" in which joblessness threatens entire societies.

Overall, unemployment in the UK fell by 8,000 in the three months to July on the preferred International Labour Organisation (ILO) calculation. Joblessness in the UK now stands at 2.47 million, or 7.8 per cent.

But even the ILO data will do little to take the pressure off Chancellor George Osborne ahead of next month's Comprehensive Spending Review. Heavy spending cuts are certain to be announced, leading to the loss of thousands – probably tens of thousands – of public-sector jobs.

"The labour market data are both disappointing and worrying overall, fuelling fears that the improvement in the labour market is coming to an end as companies' fears mount over the strength and sustainability of the upturn. This is even before public-sector job cutting really gets underway," said Howard Archer, a chief economist at IHS Global Insight.

"Major job losses are on the way in the public sector as the Government slashes spending, and we doubt that the private sector will be able fully to compensate for this. Indeed, we suspect that firms will become increasingly cautious in their employment plans, reflecting their concerns that the intensified fiscal squeeze will hold back growth."

Officials will take solace from higher employment levels, with 286,000 people finding work in the quarter to July, the biggest increase since records began in 1971. But the jump was a result of an increase in temporary vacancies and part-time roles. More than 100,000 new jobs went to former students.

Yesterday's UK figures are also likely to ratchet up the tension between the unions and the Government. At their annual conference in Manchester this week, union leaders promised to fight future public-sector jobs cuts with co-ordinated industrial action. Brendan Barber, the TUC general secretary, said: "The worry must be that we are at a turning point as spending cuts hit business and consumer confidence. What is clear is that the economy is still extremely fragile. With more than one in six young people without work, the best the Government can expect is a largely jobless recovery."

The figures yesterday followed a contrite response to the financial crisis from the Governor of the Bank of England, Mervyn King, who told the TUC conference the "cost of this crisis will be with us for a generation".

Mr King will have been acutely aware of the fact that, earlier this week, the IMF said that creeping unemployment across the world could be costlier than restarting national stimulus packages, and that rich nations should again consider reflating their economies to avoid a jobs meltdown.

At an IMF conference in Oslo on Monday, the Spanish Prime Minister Jose Luis Rodriguez Zapatero, who is grappling with 20 per cent unemployment in his country, said high unemployment may trigger a "crisis of confidence" in Europe, adding that sustained periods of severe joblessness were as likely to worry markets as much as high public-sector deficits.

The European Commissioner for Employment and Social Affairs, Laszlo Andor, added that 2010 had so far been an "annus horribilis" for unemployment, warning that, "if we fail to act, 2011 may still turn out to be the annus horribilis for social cohesion". Pessimists fear that the UK could not escape untouched by such a crisis.

Yet the country is in a stronger position than many others in Europe. Countries like Greece, Spain and Portugal have seen joblessness rocket to more than 10 per cent as their governments have been bounced into a series of tough austerity measures, cutting public-sector debt in an effort to persuade the markets that they will not default on their sovereign bonds.

Greek unemployment fell to 11.6 per cent in June from 12 per cent in May, statistics released last week revealed, but the level has jumped from 8.6 per cent in June last year. The increase is a result of cuts designed to trim Greece's burgeoning budget deficit, which stands at 13.6 per cent of GDP.

Meanwhile, the blight of joblessness stretches right across Europe, from Portugal, where unemployment stands at 10.8 per cent, to Lithuania (17.3 per cent) and Latvia (20.1 per cent). Such statistics can hardly fail to have an impact on the British economy, and a number of economists expect the UK's advantage to be eroded as the Chancellor's cuts are implemented.

"A number of eurozone countries have already started implementing cuts as part of their austerity measures," said Vicky Redwood of Capital Economics. "This process has not yet really started in the UK."

According to Mr King: "The current plan is to reduce the deficit steadily over five years – a more gradual fiscal tightening than in some other countries." Economists believe, however, that the British cuts will inevitably lead to higher unemployment. Hetal Mehta, a UK economist at Daiwa Securities, said: "We are forecasting that [British] unemployment will continue to rise and that it will almost certainly be higher than the current level by the end of next year. The private sector will pick up some of the slack, but the overall effect on unemployment figures will be limited."

Andrew Goodwin, senior economic adviser to accountancy group Ernst & Young's ITEM Club, agreed, describing the outlook for the labour market as, "pretty bleak".

Government departments are scrambling to avoid the worst of the job cuts, with ministers already ordering leading public-sector workers to draw up plans for managing with fewer staff. Meanwhile, the outlook for employment across Europe remains bleak. Capital Economics expects the jobless total to rise both in this country and in the eurozone over the next three years.

Worryingly, however, the pace of job losses is expected to be faster in Britain. The group reckons that unemployment in Europe will peak at 10.5 per cent, only a small increase on the current levels, while the level at home will rise to 10 per cent. The firm expects 16 million people to be without a job in the eurozone alone by 2013. Meanwhile, the total for all 27 EU nations has already passed 23 million, according to the OECD – up nearly 36 per cent since 2007. The challenge of reversing this trend could stretch Europe to its limits.