When you get a bad set of unemployment data, as last week, it is tempting to think there are no jobs around, and that once handed the redundancy letter, you might as well give up.
Even when times are this hard, however, there is a two-way flow. So, perhaps surprisingly, a quarter of a million people left unemployment last month and found jobs, an increase of nearly 25% on a year earlier.
Unfortunately this was swamped by the fact that nearly 360,000 became unemployed, up by three-quarters on February last year and, as was widely reported, the claimant count surged by 138,000, the biggest monthly increase on record.
The fact that plenty of people are still leaving unemployment for work, so-called job-market “churn”, reflects a number of factors. One is that there is a bigger pool of unemployed people to place into jobs. Another is that the much-maligned Job-centres may be doing better than they are given credit for, along with private-sector recruitment firms.
John Philpott of the Chartered Institute of Personnel and Development (CIPD) also suggests the nature of the recession may mean the newly unemployed are better-qualified than in the past and easier to place in work.
But if the figures suggest that “abandon hope all ye who enter here” is not the right attitude for the unemployed, they also confirm the intensity of the downturn. That is not so much in the Labour Force Survey (LFS) which, as expected, rose by 165,000 to 2.03m in the three months to January. Odd though it looks, it showed a 2,000 rise in employment over the period, though full-time private-sector jobs fell.
No, the really bad news was the claimant count’s 138,000 rise. This measure was discredited by frequent definitional changes under the Tories in the 1980s and Labour vowed to focus on the LFS measure. The old count still has the capacity to shock.
There is a chance we have seen the worst in the present cycle. For statistical purposes February was a five-week month and it is possible the snows made a bad situation in building trades worse and led to some additional workers signing on. But the number is the number and it adds to the tally of records this recession in chalking up.
Alongside it, vacancies dropped to 445,000, a quarter of a million down on a year earlier. Depending on which unemployment measure you choose, there are between three and five jobless people chasing every officially recorded vacancy.
One striking feature of the past few months has been the speed of follow through from the banking crisis of September to the real economy. Normally financial events take a lot longer to affect growth and longer still to hit employment.
This time the effects have been almost instantaneous. The near meltdown of the banking system hit credit – particularly trade credit – hard and walloped confidence. Business behaviour changed immediately, much more rapidly than consumer behaviour. The prospect of a mild recession turned into the reality of a deep one.
How deep and how long? There was a flutter last week when it was reported that new predictions from the International Monetary Fund would show a drop of 3.8% in Britain’s gross domestic product this year, followed by a further 0.2% drop in 2010 – a recession of two calendar years.
There may be such a forecast lurking inside the IMF but it is not yet telling us, though its projections for the UK budget deficit, 11% of gross domestic product, were bad enough. Updated projections were released but did not go down to the level of individual European economies. A proper update will be released next month.
History, though, tells us something useful about the duration of recessions. Paul Ormerod of Volterra Consulting gave a presentation last week to the Accumulation Society, an economists’ discussion group with a long history.
Ormerod presented data on advanced-country recessions dating back to 1871. Among the 17 advanced economies covered, there had been 255 recessions in the period 1871-2007, each defined as an episode in which gross domestic product falls from one year to the next.
Mostly, recessions end quickly. In 164 of the 255, 64%, there was just a single-year GDP fall. Next most common were two-year recessions, 58, 23% of the total. Three-year recessions are rare, 20, just under 8%; four-year slumps occurred on six occasions, 2%; five-year durations happened five times, also 2%. There was one example each of six and seven-year recessions.
Recessions are generally self-correcting, Ormerod argued, because they are usually inventory cycles. Firms over-produce and are forced to cut back, supplying demand out of stocks (inventories). Production cut-backs drive the economy into recession and only when stocks are so low that firms start producing again do you come out of it.
There is an element of all that in the current recession, though it is essentially the product of two big shocks to the economy: the credit crunch and last year’s oil and commodity price surge.
Nonetheless, the consensus among economists is that the one-year rule will apply – just. The latest Treasury compilation of independent forecasts shows economists are getting gloomier but still see positive growth in 2010, of 0.4%, after a 3.1% decline this year. Consensus Economics, which carries out a similar exercise, has average predictions of a 3% decline this year, followed by a 0.5% rise next.
Amid the gloom over unemployment, meanwhile, there was some good news last week. Many dismissed last weekend’s G20 gathering of finance ministers and central bankers as a waste of time. It did, however, include a commitment by central bankers to explore further ways of boosting their economies by unconventional measures.
Sure enough, last week both the Federal Reserve and the Bank of Japan announced plans to purchase bonds and boost money supply. The Bank of England could have felt lonely having already begun implementing its quantitative-easing programme. The more countries that join in, the better the chances of success.
PS: “Grumpy” is a badge of honour and Andrew Hilton has assembled centuries of collective experience to comment on today’s crisis. Grumpy Old Bankers: Wisdom from Crises Past, is published by Hilton’s Centre for the Study of Financial Innovation (csfi.org.uk) and is good.
Peter Cooke, former head of banking supervision at the Bank of England and chairman of the Basel committee on supervision, laments the fact that, with all the emphasis on capital, banks lost sight of liquidity. Half a century ago a liquidity ratio of 30% was the norm for UK banks. More recently 5% was considered acceptable. When things went wrong, it wasn’t.
There’s a lot here, including support for a return to “narrow” or utility banking. But Sir Jeremy Morse, former chairman of Lloyds Bank, says narrow banking could leave us with too small a system to meet the economy’s needs.
Let me leave the last word to Albert Wojnilower, Wall Street’s original “Dr Doom”. His eight-point plan is pithy and sensible. 1: Abolish rewards for short-term gains. 2: Turn most financial firms back into partnerships – if partners carry the risk, watch their behaviour change. 3: Banks that accept insured deposits should be public utilities. 4: Short-selling is “anti-social” and should be banned (a move proposed by the former Labour minister Frank Field in a private member’s bill to be published tomorrow). 5: Severely restrict what the US mortgage guarantors, Fannie Mae and Freddie Mac, can insure. 6: If other countries choose to allow untrustworthy practices, don’t copy them. 7: Restrict damaging commodity-price speculation. 8: Take direct regulatory action to limit property bubbles. Growth depends on rewarding “long-term risk-taking, hard work and perseverance”, rather than “high-stakes short-term betting”, he says. That’s wisdom.
Originally published at About David Smith’s EconomicsUK.com and reproduced here with the author’s permission.