UK Labor Market Comes Unhinged

The British labor market crumbled recently. The UK Office for National Statistics reported that the number of people who claimed unemployment benefits moved higher by 37,100 in July to 1.564 million. Unemployment in the June quarter was 7.9%, up from 7.7% in the previous one.

The UK’s economic troubles have worsened considerably recently, which leaves the government and the Bank of England less room to maneuver as each tries to find a solution to the near-recession level of expansion. Unemployment remains the central issue, along with home prices and low national tax receipts.

The UK has quickly become more like the weaker economies in Europe, and perhaps the U.S. and Japan. Japan’s issues may be in part temporary as it recovers from depressed demand brought on by the March earthquake. No matter what the comparison, the small recovery in the UK is over.

The British government continues to say it does not have the capacity to mount an aggressive stimulus because that would unwind current austerity programs. Of course, some great portion of economists think that a focus on immediate deficits is harmful. IMF chief Largarde said as much in a recent op-ed piece in the Financial Times.

National GDP growth rates are slowing in tandem now. Most recently, poor numbers where issued by Germany. In the future, it is likely that even China’s rapid expansion may slow as it tries to prevent money flow into the country in order to fight inflation. And, if all of the largest nations in the developed world have softened demand for imports, China’s economic future becomes less bright by the month.

The UK is the world’s sixth largest economy by GDP. The one just ahead of it — France — is currently the focus of worried bond markets. There has been a good deal of speculation that the nation will lose its current Aaa rating. If that happens, just behind a downgrade of U.S. paper, the markets will fairly perceive that a new recession is unavoidable.

The UK is the latest casualty of an economic slowdown and the effects that a broad-ranging stimulus might have. It can do almost nothing to reverse its fortunes because, it claims, its vaults are bare. Those bare vaults will be part of a cycle in which joblessness cannot improve.

Douglas A. McIntyre