Slower fall in unemployment

The day of the Chancellor's speech brought more confirmation that the economy's growth is slowing to a sustainable rate with news of a far smaller fall in unemployment in May than in recent months, writes Diane Coyle.

Each piece of evidence makes it less likely that the Chancellor will need to approve a rise in base rates from their current level of 6.75 per cent to meet the restated inflation target.

The retail price index excluding mortgage interest payments, the RPIX target measure, for May is due out today. City analysts expect its year- on-year increase to stay at 2.6 per cent, and the headline rate to be unchanged at 3.3 per cent.

RPIX inflation fell to a low of 2.3 per cent in November and has headed up since then. In its May Inflation Report, the Bank of England warned that RPIX inflation would climb above the 2.5 per cent ceiling because of the pound's weakness this year. However, Kenneth Clarke rejected the Bank's apparent advice to increase base rates at the beginning of May.

Most economic statistics since then have suggested the pace of recovery is already slowing significantly.

The decline in unemployment tailed off sharply in May. Underlying average earnings growth was unchanged, signalling no inflationary pressure from wages.

The number of people claiming unemployment benefit dropped by 10,000 last month to 2,317,800, or 8.3 per cent of the workforce. This was the 21st successive fall to the lowest level for nearly four years, but the drop in May was well below the 25,000 average in the past six months.

John Monks, the TUC's general secretary, said: "These dismal figures show that recovery in the labour market is in danger of stalling." However, in the City analysts welcomed the figures. "They are very encouraging for the inflation outlook," said Jonathan Loynes, an economist at HSBC Markets.

Most City economists agreed that this new evidence of slower growth would reduce the need for higher base rates for now, although some warned that there was still a danger of rising inflation due to the pound's weakness.

One of the most encouraging signs was that the underlying rate of average earnings growth did not increase as expected. It remained at 3.5 per cent, with a small rise in earnings growth in the service sector offset by a small dip in industry.

The year-on-year growth of wage costs per unit of output edged up to 1.9 per cent in April. Unit wage costs have been picking up since January, after falling for most of last year.

Employment in manufacturing industry fell by 10,000 in April, after increasing for the previous three quarters.

In the first quarter of this year total UK employment declined by 14,000 - although the rise over the previous year still stood at 177,000. In the first three months of 1995 a rise of 29,000 in the number of part- time jobs was more than offset by a fall of 42,000 in full-time jobs. Men gained 2,000 jobs while women lost 15,000.

The apparent loss of jobs needs to be treated with caution, however, as the figures are drawn from a survey of firms that under-represents small businesses. The Labour Force Survey, which surveys households instead and is generally considered more reliable, shows a rise in employment of 88,000 in the three months to February. Of these, 25,000 jobs went to men and 63,000 to women.

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