European Economies: U.K. Unemployment Reaches A 4 Year High

European Economies: U.K. Unemployment Reaches 4-Year High
Aug. 16 (Bloomberg) — U.K. unemployment rose to the highest in more than four years in July as factories shed workers and migrants swelled the workforce, damping speculation about further interest-rate increases.

The number of people claiming benefits rose by 2,000 from June to 957,000, the most since January 2002, the Office for National Statistics said in London today. The jobless rate held at 3 percent for a fifth month, in line with economists' forecasts.

The gain in unemployment prompted one of the Bank of England's seven policy makers, David Blanchflower, to vote against this month's rate increase to 4.75 percent, according to minutes of the meeting published today. Investors are betting on one more rate increase before the end of the year after inflation held above the bank's 2 percent target for a third month in July.

“The rise in unemployment is strong evidence of ample spare capacity in the U.K. economy, and should over the medium term restrain pay growth,'' said Gavin Redknap, an economist at Standard Chartered Bank in London. “As such, we expect that the Bank of England's concerns over inflation are somewhat overdone.''

The implied rate on the interest-rate futures contract for December fell 3 basis points, or 0.03 percentage point, to 5.17 percent at 4:57 p.m. in London.

The Bank of England minutes reflected doubts about the outlook for economic growth and inflation, with policy makers considering the possibility that rates may have to be lowered again.

`Time to Reverse'

“Most members thought that increasing interest rates to 4.75 percent would most likely remove a degree of monetary accommodation, without restraining demand unduly,'' the minutes said. “There would be time to reverse any increase should that prove necessary once the medium-term paths of demand growth and inflation became clearer.''

Unemployment rose in all but one of the past 17 months as factories shed workers to protect margins from soaring oil prices and migration from eastern European nations means people are joining the workforce faster than service companies can hire them.

“Manufacturing jobs have been going for ages because of cyclical weakness,'' said Nick Kounis, an economist at Fortis Bank in Amsterdam. “But, it's not necessarily a sign of weakness overall in the economy. The main factor is that labor supply has been growing so strongly that it's outstripped demand.''

The increase in jobless claims was less than the 5,000 median forecast in a Bloomberg News survey of 28 economists.


The government estimates that people migrating from eastern Europe added 392,000 workers since May 2004 after the European Union expanded to include 10 countries including Poland. More may arrive next year when Bulgaria and Romania join the 25- nation bloc.

According to International Labor Organization measures, the workforce grew by 133,000 in the second quarter from the first to a record 30.6 million. In the year through June the workforce swelled by 1.6 percent, or 483,000, the biggest jump in more than 21 years.

Employment rose by 42,000 to a record 28.94 million, and unemployment rose by 92,000 to 1.68 million. The jobless rate rose to 5.5 percent, the highest since May 2000, from 5.2 percent in the first quarter. That's below the 7.8 percent in the dozen nations sharing the euro, while higher than the 4.6 percent in the U.S.

A measure of those who are unable or unwilling to work fell by 40,000 as more older people joined the workforce.

Even as the workforce swells, workers are demanding higher pay to compensate for rising energy costs. Pay growth excluding bonuses rose to 3.9 percent in the second quarter from 3.8 percent in the three months through May, the statistics office said. The rate including bonuses quickened to 4.3 percent from 4.1 percent.

Faster Wage Growth

Faster wage growth may add to the case for another increase in borrowing costs. Only a drop in public-sector earnings growth prevented a sharper acceleration, with private manufacturers and services all reporting bigger basic pay increases than in May.

“We're going to have to see a lot of softer data to dissuade the monetary policy committee from raising again,'' said Brian Hilliard, head of economic research at Societe Generale SA in London.

The rising jobless rolls may deepen the unpopularity of Prime Minister Tony Blair, whose Labour Party government lags behind the Conservatives in opinion polls. Uninterrupted economic growth since Labour came to power in 1997 helped Blair win a third term in May 2005.

The claimant count last exceeded a million in January 2001. It reached as much as 2.96 million in December 1992 as Britain emerged from is last recession under Conservative Prime Minister John Major.

Factory Job Losses

The factory workforce shrank by 103,000 in the quarter through June, to 3.04 million, the lowest since records began in 1978, the statistics office said.

Imperial Tobacco Group Plc, Europe's second-largest cigarette maker, said July 28 it was shedding 415 jobs at plants in the U.K. and Germany to reduce costs.

Unit labor costs in manufacturing rose 2.3 percent in the second quarter from a year, up from 1.2 percent in the three months through May. Productivity growth slowed to 3.6 percent from 4.1 percent.

Services, whose output drove Britain's 0.8 percent economic expansion in the second quarter, the fastest in two years, created 93,000 jobs in the three months through March. Marks & Spencer Group Plc, the U.K.'s largest clothing retailer, said July 11 it is hiring 4,000 more shop staff to cope with increasing demand.

To contact the reporter on this story: Laura Humble in London at

Last Updated: August 16, 2006 12:00 EDT