Not out of the woods yet

Rex Features

Chill in the air again

THE recession that ended so grudgingly late last year bit more deeply into GDP than any previous post-war downturn. That made the way the labour market behaved all the more remarkable. The jobless count typically carries on rising for some time after a recession has ended. Yet the number of people claiming unemployment benefit, which had soared in the early months of 2009, actually dropped in November and December.

That encouraging picture darkened in January, according to official figures out this week. The number of those claiming jobless benefits rose by 23,500, the biggest increase since July. The rise more than undid the declines of late last year, taking the total to 1.64m, the highest since April 1997.

Even so, that is a lot lower than was expected last spring, when forecasters thought that the claimant count would reach 2.1m by late 2009. Moreover, the wider though less timely definition of unemployment—the number of people out of work and looking for jobs—dropped (though only by 3,000) between the third and fourth quarters of last year. That left it just below 2.5m. The jobless rate, meanwhile, stayed at 7.8% of the labour force—well up on the 5.2% recorded in late 2007, before the recession had begun, but still lower than feared last spring.

There are two main reasons for the muted response of unemployment to so severe a downturn. The public sector has not yet had to cut jobs, and pay has been held down in the private sector. Average private earnings rose by just 0.2% in the year to December (in the public sector, excluding state-owned banks, pay went up by 2.4%).

The fear is that, even though job losses have been contained through such pay curbs, the resilience of late 2009 may turn out to be short-lived. The recovery remains far from secure, after all. After growing by just 0.1% in the fourth quarter, national output could well stutter to a halt in early 2010. Consumers may cut back on spending now that the main rate of VAT (value-added tax) has returned to 17.5% after 13 months at 15% to counter the recession. Even if the recovery can be sustained this year, GDP growth is likely to be a meagre 1% or so.

Before too long, public employers will have to start shedding labour. And the private sector may find it hard to push through another tough round of pay restraint. Mervyn King, the governor of the Bank of England, had to write an open letter to the chancellor this week to explain why consumer-price inflation had diverged so far from the 2% target, reaching 3.5% in the year to January. Mr King said that the overshoot would be temporary, partly because it reflected the VAT increase. But pay curbs will be more painful to impose this year than last: the broader measure of retail prices often used in wage negotiations is now rising at 3.7%, whereas it fell through most of 2009.

What this suggests is that the lull in unemployment late last year may prove to be temporary. As has occurred before, the number of jobless could carry on rising even in the early stages of recovery. Since that lull came as a surprise, however, no one can be sure that the labour market will conform to historical experience. But January's rise in the claimant count is a worrying portent.