Economic Update 16th November 2011
CPI annual inflation dropped to 5% in October, down from 5.2% in September. The largest downward pressures came from falls in the cost fuel, food and air fares. Upward pressures came from the cost of clothing, electricity and gas.
RPI was at at 5.4% October 2011, down from 5.6% in September.
Consumer Price Indices
Jobless total up to 8.3%
There are now 2.62 million people without work. The rise of 129,000 is a 17 year high with some analysts predicting the total will rise further over the winter.
Youth unemployment accounts for 1.02 million of this total.
The Office for National Statistics figures also showed that the annual earnings growth rate for total pay (including bonuses) declined. The annual growth rate for the private sector fell from 2.9% to 2.4%, while the public sector rate fell from 2.5% to 2.3%.
The CBI expects unemployment to peak at 2.7 million late next year but only if the crisis in the eurozone can be resolved.
Lending to small and medium-sized firms from the four major high street banks fell to £18.8 billion from £20.5 billion in the quarter from April and June this year.
Under the Project Merlin agreement reached with the government at the start of the year, Barclays, Lloyds, HSBC and Royal Bank of Scotland (owner of NatWest) pledged to increase business lending.
New loans for the third quarter of 2011 to companies were up overall, but the big banks lagged behind with SMEs. £19.9 billion would have to be lent by the major banks to the SME sector between October and December in order to meet the Project Merlin goal of lending £56 billion to SMEs this year.
Commenting on the Bank of England report which sets out the current situation,Terry Scuoler, EEF chief executive said that the “data shows banks are at least now willing to lend. However, the cost of credit and those terms and conditions outside the headline rate remain a major concern, especially for SMEs."
Firms not hiring staff as economic uncertainty continues
Private sector businesses have halted hiring plans as the UK economic outlook deteriorates.
A quarterly survey of 1,000 employers by the Chartered Institute of Personnel and Development (CIPD) indicates that job losses in the public sector will significantly outpace private sector job creation in the next few months.
The CIPD says that the jobs market is likely to be much tougher for job applicants in the short and medium term if the world economic situation remains hostile. It is suggested that employers are adopting a "wait and see" policy, and so recruitment is on hold for many. The employment situation is expected to deteriorate in the last three months of 2011.
Better news is that fewer redundancies are planned.
The survey also found that the number of UK employers planning to outsource work overseas or to recruit migrant workers fell substantially.
Gerwyn Davies, Public Policy Adviser at the CIPD, said, “The figures point to a slow, painful contraction in the jobs market. Many firms appear to be locked in ‘wait and see’ mode, with some companies scaling back on all employment decisions against a backdrop of increasing uncertainty as a result of the eurozone crisis and wider global economic turmoil. ........ There is no immediate sign of UK labour market conditions improving in the short or medium term.”
More employees stay put
With unemployment at a 17 year high fewer people in the private sector are leaving their jobs than when the economy was buoyant.
In the transport and communication sector, a total of 3.2% of staff left in 2008 compared to 2.2% in 2009. Looking at the rates for redundancy, 0.7% left in 2008 as against 1.0% in 2009. The transport and communications figures for resignations were 0.7% of the work force in 2008 compared to 0.4% leaving in 2009.
Overall, the number of people leaving their main job in April to June 2011 was 674,000, a drop of 42% on the 1998 peak of 1.17 million.
57% of staff chose to leave, while the remainder were made redundant in the April to June 2011 period.
Analysts say that decline in movement of staff suggests that the UK labour market is now less dynamic.
The figures come from the Office for National Statistics.
British banks in eurozone firing line
Italy’s precarious financial situation highlights how exposed the UK’s four biggest banks are if the eurozone crisis is not resolved satisfactorily. Together these banks hold £42 billion of Italian debt.
Barclays has the largest overall Italian loan book at £25.7 billion. £4 billion of this has been lent directly to the Italian government.
Royal Bank of Scotland which is part owned by the UK government, has the second largest total exposure at £9.7 billion.
HSBC is next, followed by the Lloyds Banking Group.
If the UK banking system freezes up because fear spreads about the ability of governments or companies to repay debts, then business lending will drop leaving many businesses in a vulnerable position.
UK banks have also loaned substantial amounts to France, which is also under pressure.
The crisis in the eurozone of 17 nations increases the risk of a UK debts default. The reason is that although this outcome is unlikely at present, it could happen if the interests rates at which the UK government can borrow money on the open financial markets are pushed up to unaffordable levels. Interest rates could spiral up as the fear in the markets spreads of who can pay and who cannot.
The UK government needs to borrow on the international markets to pay for day to day spending that cannot be met from tax revenues.
The government’s borrowing requirements often increase in tough economic times because the tax take falls as more people are worse off or out of work, and because businesses fail to make significant enough taxable profits.
If the position is ever reached when UK government cannot borrow enough to cover day to day spending then an international bail-out or a default could happen.
In 1976 the Labour government was forced to apply to the International Monetary Fund (IMF) for a bailout loan. At the time, the IMF insisted on deep cuts in public spending as the price for the loan.