Right now there are a lot of fears of the unknown. January is turning out to be a month for fretting. Mervyn King, the Bank of England governor, is concerned that current favourable conditions won’t last, and that the trigger for turbulence could be a rise in long-term interest rates.
But as long as long-term rates remain low, particularly on index-linked UK government bonds (gilts), there is a problem for pension funds, which are forced to buy them. Low yields don’t generate enough returns to meet pension liabilities. Nor do they encourage businesses to invest, which normally they should.
In another part of the Bank Sir Andrew Large, King’s outgoing deputy, has always been a bit of a worrier, notably about household debt. He thinks financial markets are looking “frothy”. As if on cue, the Japanese stock market, the pundits’ favourite for 2006, fell sharply before regaining its composure.
There are other examples of what Donald Rumsfeld memorably called “unknown unknowns”, or perhaps these are “known unknowns”. Will Iran’s erratic leadership and Nigeria’s dissidents give us a third global oil crisis by limiting supplies? If so, my prediction of an eventual sharp fall in prices will take a bit longer to come true.
But let me stay, for this week at least, with what we do know. There has been a lot of debate about whether Britain’s economy has been as weak as some of the official figures suggest. The latest labour- market numbers, however, suggest the slowdown story was accurate.
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The claimant count rose by 7,200 last month to 909,000. Apart from January, it rose every month during last year, something that hasn’t happened since the last recession in the early 1990s. The claimant count appears to be heading inexorably back above 1m, a level that, when threatened, led the Heath government into its infamous economic u-turn in 1972. I don’t think the Blair government has a u-turn up its sleeve. I’ve commented before that part of the explanation for the rising claimant count is employers’ preference for migrant labour. This goes beyond that.
Significantly, the wider measure of unemployment, based on the Labour Force Survey, the government’s preferred figure, rose by 111,000 in the three months to November. This was not only the biggest rise since early 1993 but it meant a jump in the unemployment rate in three months from 4.6% to 5%, and it took the jobless number above 1.5m.
Wherever you looked there was weakness. Employment dropped 22,000 in the latest three months, particularly among younger people and women. Curiously, the strongest growth in employment is among people above the state pension age. It is too early to say this is a trend but, by getting jobs, or not retiring (partly because of pension problems) the wrinklies may be displacing youngsters. To complete the weak picture, job vacancies fell.
Perhaps the most eyecatching number, however, was the number of “economically inactive” people of working age. This rose by 25,000 to 7.94m, the highest since comparable records began in 1971.
There are many reasons for the rise in economic inactivity. It is a direct consequence of higher staying-on rates in schools and higher university participation — 1.85m of the inactive are students, no joke intended. It is also a reflection of past policies designed to massage down the jobless numbers for political reasons.
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It includes early retirees (0.6m), and the long-term sick (2.1m). Many of the inactive (2.3m) — and they would dispute this label — are looking after family and home. In all, three-quarters of the inactive say they are not seeking work.
But that leaves just over 2m who say they are. Add that to the 1.5m counted as unemployed and you end up with what John Philpott, chief economist at the Chartered Institute of Personnel and Development, characterises as “underlying joblessness” of 3.5m. Ministers may have chosen the worst moment to get some of the inactive, notably those on incapacity benefit, back into work.
The weakness of the employment figures takes us into interesting territory. There is a vogue for comparisons with Germany, especially since the Organisation for Economic Co-operation and Development (OECD) forecast that Britain’s tax and spending burdens will soon be above those in the federal republic.
Even more remarkable, perhaps, is that the OECD also thinks sclerotic, unreformed, high-unemployment Germany, will soon have a higher employment rate — the proportion of the working-age population in jobs — than Britain. Last year, according to the OECD, Britain’s employment rate was 72.2%, Germany’s 71.3%. This year the figures will be 71.8% and 72% respectively, it says, with the gap widening further in Germany’s favour in 2007.
It is too early to say whether this weakening in Britain’s job market will last. The latest figures show 221,000 jobs were created over the past year, in spite of the recent drop, most of them in the private sector.
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But if a weaker job market is the shape of things to come, it will have far-reaching consequences. It will reinforce the slower trend for consumer spending, notwithstanding the strong December figures, and, by extension, give us subdued growth for the economy as a whole.
It could also undermine Britain’s status as the most vibrant job market in the EU and a magnet for migrant workers. The government has assumed that migration will keep the population and the labour force growing and help offset the ageing of the population.
It sees a virtuous circle created by Britain’s economic dynamism. The employment numbers confirm that at least some of that dynamism has worn off. Our best days may be behind us.
PS: Liberal Democrat members will make up their own minds but the economic journalists’ choice has to be Chris Huhne. After all, he used to be one of us. Sharp of mind and with brooding good looks — though there’s a touch of the actor Rodney Bewes about the photo on his campaign website — he could be what the Lib Dems need. The only surprise, perhaps, is that he has not made more of his economic credentials. His campaign launch was worthy but dull — on the environment and cutting down Whitehall.
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Not many economic journalists, or economists for that matter, make it to the top in politics. Some would say that’s just as well. Nigel Lawson, chancellor from 1983 to 1989, a period that ended with an inflationary boom, started as a financial journalist. Harold Wilson was a brilliant student and briefly an academic economist at Oxford, but this background did not prevent the horror of his “pound in your pocket” address to the nation after the 1967 sterling devaluation, when he said it had made no difference to the value of the pound in people’s pockets.
In other countries, particularly in Europe, the journey has been a lot easier. In America, you don’t have to be a career politician to get into the cabinet. I can’t think of any economic journalists who have held positions of power, though plenty of economists have. Larry Summers, US treasury secretary in the second Clinton term, is a distinguished economist, as is Robert Reich, who served as labour secretary. I didn’t know that George Shultz, Ronald Reagan’s secretary of state during the cold-war battles of the 1980s, was an economist and professor.
So there’s definitely a gap at the top in Britain. Can Huhne fill it?