Good Job?

At last, some good news for the British economy? Unemployment fell in the UK in the final quarter of 2007, with both the Claimant Count and Labour Force Survey measures recording decreasing joblessness. Overall, the employment rate has risen to 74.7%.

The Claimant Count recorded a drop of 10,800 to 794,600 and the LFS a fall of 61,000 to 1.61 million. As expected, the distribution of employment and unemployment differs from region to region, and also within regions.

The data was greeted by Mervyn King as an opportunity for the media to present a more ‘balanced picture’ of the UK economy. However, the good news was tempered by talk of time lags as the recent events in credit, stock and housing markets are yet to show up on labour market data. Employment was also boosted by lower than expected earnings inflation, which may not be sustainable if, as Mervyn King has suggested, prices are likely to rise at a rate above the 3% ceiling used by the Monetary Policy Committee. With limited scope for further rate cuts, it may be inevitable that growth will slow both in the UK and in export markets, and so jobs will be lost faster than they can be created.

There are two possible escape routes:

1. An expansionary budget in March. Such a move may force the Treasury to finally and formally abandon its self-imposed fiscal rules.

2. A rewriting of the CPI target. With a time lag of somewhere between 12 and 24 months before a base rate decision fully affects prices, the Bank of England could attempt to justify a further base rate cut as being necessary in a low inflation expected in 2009.

Both these options carry a significant political risk (the perception that Labour is returning as the party of financial management, perhaps) and economic risk (a shattering of the expectation that inflation is low and will stay low). The last thing the present administration (and electorate) needs right now is a damaging wage-price spiral.