The British economy’s low unemployment rate of 4.3% may be masking deeper issues, as a reliable measure suggests that the country is experiencing the sharpest rise in joblessness in the developed world. This has raised concerns of an impending recession in the City of London.
The “Sahm rule,” named after US economist Claudia Sahm, indicates the start of a recession when the three-month moving average of the unemployment rate increases by 0.5 percentage points or more relative to the previous 12 months’ low. This rule has accurately predicted every US recession since the 1960s and has also been effective in signaling British recessions since the mid-1970s. However, it was slightly delayed during the pandemic downturn due to the furlough program artificially suppressing unemployment figures. The rule did produce two false positives during the eurozone debt crisis and the financial crisis.
At present, unemployment in Britain has risen from a near half-century low of 3.5% last year to 4.3%, surpassing the 0.5 point threshold set by the Sahm rule. Nomura’s analysis reveals that this increase in joblessness is significantly higher in Britain compared to major economies like the United States, Germany, France, Spain, and Italy.
The once robust British job market has now become a major obstacle, with a potential recession looming just before the general election expected next year. Prime Minister Rishi Sunak, who is trailing the opposition Labour Party in polls, has made growing the economy a key focus of his agenda.
Dan Hanson, senior British economist at Bloomberg Economics, expressed concern over the rising unemployment rate, stating, “Joblessness tends to rise rapidly during recessions, which feeds back negatively onto spending. A big jump could mean our own forecast for a modest downturn is too optimistic.” He predicts a recession starting in the fourth quarter.
The pandemic-induced labor shortages had suppressed joblessness, but now, with the economy grappling with higher interest rates and a severe cost-of-living crisis, unemployment is on the rise. Forecasts indicate that the unemployment rate will remain at 4.3% in the three months leading up to August. However, it is expected to climb further in 2024 and may exceed 5%.
Nomura’s Chief British Economist, George Buckley, believes that the labor market, in combination with other factors such as higher interest rates, a weaker housing market, and high inflation dampening real wage growth, will play a pivotal role in pushing Britain into a recession.
Interestingly, the rising joblessness may be seen as positive news for the Bank of England. As officials strive to bring inflation back to target levels, they are concerned that salaries continue to grow at a record pace, even two years after raising interest rates. This poses a threat of a wage-price spiral.
In summary, while the British economy’s low unemployment rate may suggest stability, the Sahm rule’s indication of a sharp rise in joblessness raises concerns of an impending recession. The British job market, once a strength, is now a significant challenge for policymakers. The Bank of England sees rising joblessness as an opportunity to combat inflation. As the country heads towards a general election, Prime Minister Rishi Sunak’s commitment to growing the economy faces a serious test.
More detail via The Star here… ( Image via The Star )