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Weekly economic data preview - Monetary policy ‘exit strategies’ to dominate in 2010; Economics Weekly - Is the UK labour market on the road to recovery?

Economics Weekly - 21 December 2009


Is the UK labour market on the road to recovery?


In November, claimant count unemployment fell by 6.3k. The decline represented the first fall in the UK claimant count since February 2008, raising hopes that the labour market may finally have turned the corner. Other broader labour market indicators, however, suggest it is too early to call a turn. For example, in the latest month, both the claimant count and ILO unemployment rates were unchanged, the latter at a 12½ year high of 7.9%. Furthermore, the ILO measure of unemployment, which includes individuals who are seeking work but not claiming benefit, rose a further 21k in the three months to October.


Nevertheless, it is clear that the pace of job losses has slowed markedly. The latest three-month rise in ILO unemployment was the lowest since May 2008 (see chart a). While it may be too early to suggest that unemployment is falling, the decline in the pace of job shedding is clearly good news. This raises the question: why has the labour market started to improve given the scale of the recent economic downturn? And, more importantly, is this improvement likely to last?


Output fall has outpaced job losses

Since the recession began around eighteen months ago, the headline claimant count has risen by 838k to 1.63mn, while over the same period, ILO unemployment has risen by 877k to 2.49mn. Given the scale of the downturn, it is striking that the rise in unemployment has not been higher. For example, during the recession of the early 1980s, which was similar in severity to the latest recession, both claimant and ILO unemployment rose by almost 1mn. In the recession of the early 1990s, both claimant and ILO unemployment rose by over 800k. This is similar to the job losses posted in the recent recession, despite the fact that the early 1990s recession was far shallower (see table a).


It is not only in the UK where job-shedding has been surprisingly modest. Although the level of GDP in Germany has fallen by 5.6% since Q2 2008, the unemployment rate has remained almost unchanged, at 7.5%. Similarly, in Japan, the total loss in output since Q2 2008 has been close to 8%, yet Japan’s unemployment rate has risen by only 1.3 percentage points since then. By contrast, the rise in US unemployment has been far stronger, despite the fact that the US recession has been smaller (see table a).


We believe the apparent inconsistency between output losses and increases in unemployment reflects the relative flexibility of the US labour market, which has allowed it to adjust more quickly, compared with that of Germany, Japan and, to a lesser extent, the UK. In Japan, employment losses have been constrained by lifetime work practices, while in Germany, they have been limited by government wage subsidies. The relative size of union power in these countries has also been a factor.


The relative resilience of the UK labour market, therefore, may not necessarily be a reflection of its underlying strength, but rather underlying structural weakness. Indeed, evidence suggests that, instead of shedding jobs in response to the downturn, UK companies have hoarded labour and cut hours worked instead (see chart b). They are reportedly doing so because of the high costs of redundancy, and concerns they may not be able to attract sufficiently skilled labour when the recovery arrives.


Composition of job losses has changed

Also telling is the tenure and sector make-up of the job losses of the latest recession. Over the past eighteen months, part-time employment has increased its share of the workforce by 1.1 percentage points, to 26.5%. Again, this suggests that firms are cutting hours and putting workers on part-time work, rather than shedding jobs.


Of those jobs that have been lost, most have been in private services. Since Q2 2008, total employment has dropped by 782k. Of this, job losses in private services have totalled 571k, compared with 314k in manufacturing and 156k in construction. But notably, public sector employment has risen by a further 260k since the recession began, providing a significant cushion to the labour market downturn. As fiscal policy is tightened, this support may not prove as effective.


The hit to private services employment has been sharper than in the recessions of the early 1980s and 1990s, when the manufacturing sector bore the brunt of the job losses (see chart c). While the shift in the sector make-up of job losses reflects the relative shift in industry size over the past thirty years, the recent hit to private services has been compounded by the fact that the genesis of the latest recession was in the financial sector.


Unemployment has not yet peaked

Looking ahead, the above analysis suggests that the labour market may not yet have fully adjusted. Given the scale of the drop in GDP over the past eighteen months, and the typical lag between layoffs being announced and implemented, we suspect unemployment will continue to drift higher.


Nonetheless, with the economy expected to steadily improve, the pace of job losses should remain modest. We expect headline ILO unemployment to reach a peak of 2.8mn by mid-

2010 (see chart d). However, the subsequent improvement is unlikely to be particularly strong. Given that firms have hoarded labour, there is likely to be less impetus to take on new workers when demand conditions normalise. This may be a factor limiting the extent of the economic recovery in 2010 and beyond.

Adam Chester, Senior UK Macroeconomist, Corporate Markets


Editorial comments to:

Trevor Williams

Chief Economist

Lloyds TSB Corporate


Economic Research

10 Gresham Street

London, EC2V 7AE

Tel: +44 (0)20 7158 1748


Weekly economic data preview - 21 December 2009


Monetary policy ‘exit strategies’ to dominate in 2010


􀂄 Monetary policy ‘exit strategies’ are almost certain to be one of the dominant themes in 2010. Among the major developed country central banks, the ECB and Federal Reserve have already embarked on such strategies, although the latter continues to mull whether additional purchases of agency debt and MBS will be required. Meanwhile, the Bank of England – which announces its latest monetary policy decision on 7 January – seems the least likely to implement an exit strategy at the present time. Meanwhile, the next three weeks features a variety of economic releases, outlined below.


􀂄 In the UK, the minutes of December’s MPC meeting are published on Wednesday, where the Bank of England left Bank Rate on hold at 0.5% and continued with its £200bn programme of asset purchases. As an alternative to these purchases, November’s minutes introduced the possibility of a reduction in the rate payable on commercial bank reserves, in order to lower market interest rates. This topic was likely to have been discussed again at December’s meeting, where we look for unanimous decisions on both Bank Rate and the Asset Purchase Facility. We also expect no change in this monetary stance at the Bank’s next policy meeting on 7 January. In terms of economic data, final Q3 GDP figures are due on Tuesday where we anticipate a 0.1% quarter-on-quarter decline in GDP alongside a narrowing in the current account deficit, to £8.2bn. We expect the 0.2pp upward revision to gdp to stem from recently-released construction and business investment data. Early in 2010, November consumer credit and mortgage approvals data are published, where we see outturns of -£0.4bn and 50k, respectively. Finally, we expect December’s PMI surveys to show a further expansion in activity, albeit at a modestly weaker pace (manufacturing: 51.0 and services: 56.5).


􀂄 The next FOMC meeting is not due until 27 January, but attention remains focused on the pace of US economic recovery. Following the downward revision in the second estimate of Q3 GDP, next week’s final estimate will be closely watched, as will latest new and existing homes sales data. We look for existing home sales to register 6.3 million units in November, as the expiry date for the first-time home buyer tax credit approached. We expect a similar story for new home sales (forecast: 440k units). Case-Shiller house price data, meanwhile, are published on 29 December. Crucially, December’s non-farm payrolls report is scheduled for 8 January. November’s -11k outturn prompted much excitement in financial markets, with the dollar rallying significantly. But it may yet be optimistic to assume that this pace of improvement will be sustained. Our December payrolls forecast therefore stands at -30k. Encouraging labour market signs notwithstanding, the US consumer is not out of the woods yet, although we look for Conference Board consumer confidence to register 51.0 in December, versus November’s 49.5. Manufacturing and non-manufacturing ISM surveys for December are also due over the coming weeks, where we anticipate a broadly flat reading of 53.5 in manufacturing and an improvement to 49.5 in services.


􀂄 With the ECB’s next Governing Council not scheduled to meet until 14 January, attention turns to various eurozone indicators. Of these, the money supply data – released on 30 December – are particularly significant. M3 expanded by just 0.3% in the year to October, while bank lending to the euro-zone private sector fell by some 0.8%. Jean-Claude Trichet has noted a recent bottoming out in the falls in mortgage lending, but overall bank credit availability is still restricted (especially in countries like Germany), so that an improvement in the aggregate lending data for November seems unlikely. This is especially true for non-financial corporations, where subdued demand for loans is as much an issue as restricted supply. Other key eurozone data include December’s (final) PMI surveys, where we look for outturns of 51.6 and 53.7 for manufacturing and services. Elsewhere, German consumer confidence, Italian business confidence and euro zone industrial orders are all published.

Mark Miller, Global Macroeconomist



Economic Research,
Lloyds TSB Corporate
10 Gresham Street,
London EC2V 7AE
0207 626 - 1500


Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business.



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