Surprise jobless fall lifts recovery hopes

LONDON Wed Apr 13, 2011 5:38pm BST

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LONDON (Reuters) - The jobless rate fell unexpectedly and the number of people in work jumped in the three months to February, in a welcome sign to the government that firms are feeling more confident about hiring.

The number of Britons claiming unemployment benefit ticked higher in March, but those figures are still skewed by a recent rule-change for single parents, the Office for National Statistics said on Wednesday.

The rise in employment chimes with recent surveys showing that manufacturing and services firms plan more hiring, key for the economy as the government culls hundreds of thousands of public sector jobs in a bid to cut the budget deficit.

Other signs on Britain's overall performance have been mixed and Wednesday's numbers also showed wage growth slowing, highlighting the still-fragile state of the economy.

"The labour market recovery is looking a bit healthier," said Vicky Redwood of Capital Economics. "But the continued falls in real pay do not bode well for consumer spending."

The number of people without a job on the broad ILO measure fell by 17,000 in the three months to February to 2.480 million, the ONS said. That reduced the jobless rate to 7.8 percent, below forecasts for a reading of 8.0 percent.

In addition, the number of people in employment rose by 143,000 in the three months to February -- the biggest increase since last September and driven by the biggest rise in the number of people in full-time employment since May 2007.

LOOMING RISKS

However, economists and business leaders were far from sounding the all clear as knock-on effects from the government's spending cuts could hurt sectors dependent on consumer spending.

A report on Wednesday indicated there had been a big jump in the number of British companies in serious financial distress, with restaurants and the leisure industry hit particularly hard as looming public sector job cuts dent morale.

"A significant number of public sector staff will have received formal notification of impending redundancies which will have had an impact on discretionary consumer spending," the report's compiler Begbies Traynor noted.

Elsewhere, online fashion firm ASOS and sportswear store operator JD Sports bucked a gloomy retail climate with strong numbers, showing there are still winners in straitened times, but JD did warn it was "extremely cautious" about prospects for the coming 12 months.

SHAKY RECOVERY

The government is banking on private businesses to create new jobs to get the economy going again after a surprise contraction at the end of 2010.

"Well, this is a small step in the right direction. It's obviously welcome whenever we see unemployment come down," Employment Minister Chris Grayling told Sky News.

However, the positive tone to the labour market report was marred by slowing wage increases, which will put household finances under further pressure at a time when taxes are rising and food and fuel costs keep climbing.

Average weekly earnings growth including bonuses eased unexpectedly to 2.0 percent from 2.3 percent in the three months to January, confounding forecasts for a rise of 2.6 percent. With inflation at 4 percent, that means people's real incomes are still falling.

Economists said modest wage growth showed the labour market recovery was fragile and provided the Bank of England with leeway to hold fire on rises in interest rates as there was little risk of a spiral of higher wages that would boost prices.

"We must remember that the headwinds from the public sector have been relatively light to date and will stiffen significantly this year," said Nida Ali, economic adviser to the Ernst & Young ITEM Club.

"As the pace of job losses in the public sector accelerates, the private sector will have to work ever harder to create new jobs if we are to avoid unemployment rising again," he added.

Overall, the figures did not alter expectations that the Bank will not rush to raise rates from a record low 0.5 percent.

A surprise slowdown in inflation last month all but wiped out expectations of any tightening in May and caused markets to doubt any move before August.

(Additional reporting by Paul Hoskins, editing by Patrick Graham and Stephen Nisbet)

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