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Unemployment falls for second month despite global recession

Philip Thornton Economics Correspondent
Thursday 21 March 2002 01:00 GMT
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Unemployment fell unexpectedly in February, for the second month in a row, providing fresh evidence that the UK economy has emerged virtually unscathed from the worst global recession for a decade.

The surprise drop in dole queues came as the Bank of England warned that the risk of inflation had risen, a signal that interest rates are likely to rise.

The number of people claiming benefit fell by 5,000, defying forecasts of a rise of 8,000, to 947,200 – only slightly above a 35-year low reached last summer. The jobless rate fell to 3.1 per cent, the same as last year's quarter-century low, National Statistics said.

The more reliable ILO measure, which includes those out of work but not claiming benefit, rose 8,000 on the previous three months to 1.53 million, although the jobless rate was steady at 5.1 per cent.

The number of people in employment over the latest three months rose by 23,000 as companies continued to take on new workers despite the economy having ground to a halt.

"Jobs are being created in the economy – though they are not as widely reported as the redundancy notices that most of the media seem to find so sexy," said Nick Verdi, an economist at Barclays Capital.

However, manufacturing companies continued to carry out their bloodletting, with 158,000 jobs axed over the past 12 months.

This implies that the public sector and the parts of the service sector linked to the booming consumer are more than offsetting the loss of production jobs. National Statistics' figures showed that, on balance, 12,000 new jobs were created over the three months to January.

But despite the demand for staff, pressures on pay and bonuses had diminished to their weakest levels for at least a decade. Growth in average earnings fell to 2.7 per cent in January, its weakest since records began in 1991, from 3.4 per cent in February.

However, the picture of a perfectly benign labour market – strong jobs growth but little pay pressure – was distorted by comparison with the City bonus boom of a year ago. While bonus levels were almost 2 per cent lower than a year earlier, basic salaries rose at an annual rate of 4.2 per cent, close to their recent average.

Some economists worried that the UK was embarking on a strong recovery at a time of close to full employment.

"With the global economy cranking into gear the 2003 wage round will come against a background of above-trend growth," said Ross Walker, at Royal Bank of Scotland. "More aggressive wage demands carry a potential inflationary threat."

The Bank of England also signalled its worries yesterday. The minutes of its March monetary policy meeting showed that the nine-strong committee voted unanimously to keep rates on hold.

The minutes noted that the rebound in world activity had come earlier and was "faster and more broadly based" than it had envisaged just a month before. "The balance of evidence on the month pointed to somewhat stronger prospects for UK activity," the minutes read. "It was likely that this would imply a higher path for inflation than had been envisaged in February."

The minutes were also significant in that they revealed that Chris Allsopp and Sushil Wadhwani, who had voted unsuccessfully for a cut in two of the past three months, abandoned their campaign. No one argued either for a cut or increase, instead concluding that it was "clear" that rates should be left unchanged.

"Although the committee appeared keen to present a neutral outlook its positive assessments are ultimately likely to lead it to hike rates," said David Page, an economist at Investec.

But the Bank tempered its new enthusiasm with a warning that the high level of household debt threatened to trigger a sharp fall in consumer spending without a more gradual slowdown.

This was highlighted by lending figures yesterday from the major banks, which showed another strong rise in borrowing. Total lending rose by £5.15bn in February compared with £4.96bn the previous month, the British Bankers' Association said. Mortgage lending rose £3.93bn, close to the all-time peak in January, while unsecured debts rose £867m.

The role of the public sector in boosting the economy was highlighted by official figures that showed government spending was growing at an annual rate of almost 10 per cent a year in February.

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