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Record rise in unemployment and worse to come

Latest update : 2008-07-16

The UK labour market has weakened for the fifth month in a row with June seeing the highest rise in unemployment since 1992. Analysts forecast worse ahead due to inflation and worries in the construction and financial sectors.


LONDON - The number of Britons out of work and claiming benefits rose for a fifth month running in June and by its largest amount since the slump of the early 1990s, in a sign the economic slowdown is starting to bite.


Analysts say unemployment looks set to rise further as companies shed workers to try to cope with the downturn -- a further blow for the ailing Labour government which lags far behind in the opinion polls.


The Office for National Statistics said on Wednesday claimant count unemployment rose by 15,500 last month after an upwardly revised 14,300 increase in May.


That was the biggest jump since a 71,000 rise in December 1992 and above analysts' forecasts for an increase of 10,000.


Sterling fell after the larger than expected rise in claims encouraged investors to bet that interest rates may fall to shore up the economy even as inflation rises.


"The labour market is being hit increasingly by the marked economic downturn," said Howard Archer, an economist at Global Insight.


At 2.6 percent in June, however, the proportion of working age people claiming benefits is a far cry from the near 10 percent rates seen in the early 1990s when the economy was in recession.






But economists say worse lies ahead for the UK workforce.


"Expect the labour market to weaken further -- we see the unemployment rate rising to 8 percent eventually from its current 5.2 percent, equating to a rise of 900,000," said Vicky Redwood, an economist at Capital Economics, referring to the internationally comparable ILO measure of unemployment.


Annual average earnings growth in the three months to May eased to 3.8 percent from 3.9 percent in April, the ONS said. That was slightly higher than expected but still shows higher living costs have yet to feed through to wages.


A separate survey by the Engineering Employers' Federation also out on Wednesday showed pay settlements holding steady at 3.1 percent in the three months to June.


The government and the Bank of England are concerned that the highest inflation in at least a decade -- consumer price inflation hit 3.8 percent in June, way above the Bank's 2.0 percent target -- will lead workers to demand much higher pay and embed sharp price rises.


Hundreds of thousands of local government staff went on strike on Wednesday in protest over pay, arguing that wage settlements are not keeping pace with the rising cost of living.


While record fuel and food prices look likely to keep up pressure for industrial action, economists say labour market weakness should help tame pay pressures and eventually allow the BoE to cut interest rates.


With house prices falling, construction firms have announced around 4,000 job cuts this month. Thousands of workers in the financial sector are also expected to lose their jobs as the credit crunch continues to take a toll.


"With wages failing to keep pace with the cost of living and unemployment rising, the outlook for consumer spending remains grim," said James Knightley, an economist at ING.


"Our view remains that rate hikes remain unlikely and that the policy rate will be moved aggressively lower from early 2009 onwards as inflation starts to drop."

Date created : 2008-07-16