Jobs and the economy in 2008 - an update

It may seem like the slowdown in the world economy is not having an impact upon the jobs market in the UK. This is probably true for now, but this doesn't mean it won't.

The first people who are likely to lose their jobs in the current slowdown are those working for the big banks. Another big bank, UBS, announced 5,500 worldwide job cuts this morning. These jobs cuts will be made over the next year through a process of redundancies, fewer job created and natural wastage. All in all it is estimated that banking jobs and those jobs supporting the banking sector will fall by between 20,000 and 40,000 in central London alone.

Wider job losses are likely to follow soon after. The next groups to suffer will be those working in the housing market. With fewer housing transactions there will be less work for estate agents and house builders.

Next as the housing market slows and as the price of day to day living increases, people are likely to be spending less at the shops. Retailers have already started to see sales falling in March and probably in April. Some retailers will go bust and jobs will be lost.

Jobs will gradually be lost from the wider economy. As activity slows there will be less business to do and less need for additional staff. Tighter margins will mean that cost saving measures will be necessary for many businesses, including cutting headcounts.

One upside is that manufacturing may fair slightly better than it has done in the recent past. The weak pound should help to make British manufacturing more competitive, helping to support manufactured exports. However, with the world economy slowing and Britains export partners suffering this is not guarenteed.

Although the labour market has remained resilient in the first few months of 2008, expect to see unemployment start to rise in the next few months. We are not going to see unemployment levels at a level comparative to the early 90s, but it is going to be quite unpleasant for many.

Decisions decisions – the outlook for interest rates

Today saw the Bank of England keep interest rates on hold at 5.25 per cent, following a cut in February. Many people had been expecting this decision given that all the signs are pointing towards a period of higher inflation with both input and output prices rising, and commodity prices hitting record highs.

The economy also seems to be weather the storm for now, reducing the imperative for the Bank to cut rates immediately. Recent January retail sales figures as well as improvements in both the manufacturing and services purchase managers’ index indicated that the economy was still expanded, and was not in a period of universal suffering. Most significantly, the labour market has continued to perform well. Although wage growth has been squeezed in both the public and private sector, the number of jobs in the economy continues to grow, whilst the numbers of those claiming unemployment benefits continue to fall.

Despite a selection of “good news” stories, the outlook remains grim, and underlying problems are starting to show themselves. As a result, the primary reason why the Bank of England didn’t cut interest rates was because the short term outlook for inflation has increased, stifling the Banks ability to pre-empt the slow down in the UK economy. Inflationary pressures have been growing as a result of rising energy and food prices. These are clearly outside of the control of the Bank, which can now only hope for a good harvest, increased output from OPEC and a more stable international commodity market.

Higher prices not only reduce the ability of the Bank of England to cut interest rates, they also squeeze the consumer. With consumers seeing food prices rise by around 6 per cent over the past 12 months they have been forced to reduce their spending on other items. The crisis in the banking sector has seen lenders increase their margins which has resulted in mortgage repayment rates remaining high, despite the cuts in the base rate, resulting in mortgage interest repayments rising by over 16 per cent in the past 12 months. Household budgets have become increasingly stretched, and with few savings the consumer is likely to cut spending on non-essential goods over the rest of the year.

The housing market also continues to slow. According to both the Halifax and Nationwide house price indices prices have fallen in each of the past four months. Although this will not directly impact upon those who are not moving house, those that do move may face negative equity. The housing market has also allowed many to re-mortgage and release equity in their houses over the past two years which has helped to fund increases in spending. With falling house prices and less capital to lend, the ability to release equity is becoming increasingly difficult.

Another worrying sign is the revival of the spread between Libor and base rates. Libor indicates the interest rate that banks are willing to lend to one another. When there is a lack of credit or banks are worried about the risk of lending in the financial market, they will withdraw their credit, making it increasingly expensive to borrow money – increasing the Libor rate. The Libor spread had fallen steadily since the start of the year, but with expectations of further losses in the banking sector, it is once again increasing. This suggests that the worst is not yet over in the banking market, and it is far from getting back to a normal lending environment. As a result banks will continue to charge higher interest rates to both businesses and consumers.

So why hasn’t the Bank cut rates as rapidly as the Federal Reserve? There are two reasons for this. On the one hand the economy in the UK is not as bad as the US. The US economy has seen much larger losses in both the housing market and the financial sector. The economy appears to be shrinking and jobs are being lost. The other reason is that the Bank is far more tied to the inflation target of 2 per cent than the Federal Reserve which has a broader remit to maintain economic and inflationary stability.

Nevertheless the Bank will cut interest rates this year and next. Inflationary pressures are likely to limit interest rates in the next eight months. I would expect there to be just two 25bp cuts between now and September. However, as the economy slows and prices fall, and the rapid rise in prices at the end of last year fall out of the annual growth rate equation, the Bank will have the scope to cut interest rates more rapidly. I would expect further interest cuts at the end of the year, with perhaps even a 50bp cut before the start of 2009.

I remain positive that the UK won’t enter a recession in 2008, however, it will be a very tough year for many people and things will get worse before they get better. I would not be surprised to see unemployment start to rise in the next few months and the claimant count could well rise past one million, up from about 850,000 at the moment. With higher unemployment, wage growth is likely to remain low, and bonuses are unlikely to look particularly healthy. Expect plenty of disappointment in 2008, with fewer jobs about, lower wages and more stress its not going to be the nicest place to have a job – but it’ll be far better than having no job at all.

Worst day for FTSE since 9/11

Today was the worst day for the FTSE 100 since the attacks on the Twin Towers. Fears that recession in the US is now more a probability rather than a possibility has fueled fears that this will have an impact on company profits in the United Kingdom, particularly the large, internationally focused firms.

The worst hit companies were commodity based firms. The slowdown in the US and the likelihood that China will put the breaks on is set to reduce the demand for commodities such as copper. As a result the price of copper and other commodities are likely to fall in 2008 and as such so will the profits of the major mining companies. Other factors such as stalled aquisition plans also had a negative impact upon firms in this sector.

With the US markets closed today the full impact of today's fall will start to become clearer tomorrow. The market has been particularly volatile during the past six months and as such it would not be a great surprise if investors believe the markets went too far today and start to buy some shares which now look cheap.

However this level of nervousness and instability is not a good sign for the markets and the wider economy. Markets now seem to be coming to a conclusion that the United States is entering - or may have already entered - a recession. This will have a negative knock on effect upon the whole of the international economy. Although it may take some time to directly impact the UK, it will put downwards pressure on exports from the UK - not just to the US but internationally as the whole world slows. Weaker financial markets will also hinder activity in the financial services sector in London which provides many jobs and is a principle driver of the whole economy.

Coupled with the credit crunch the financial system is not looking in good health. This coupled with the slowdown in the US, over stretched consumers, a weakening housing market, high government debt and continued inflationary pressures will not make 2008 a very tough year. A recession in the UK is still not a likely outcome, however it won't take to much for it to become more so.

Get ready for rising unemployment and a tougher labour market - if you're looking for a job expect less opportunities and greater competition. If you are moving jobs choose the sector and company carefully because not all companies will survive 2008.

Labour market statistics - hiding the start of slowdown 2008

As I mentioned yesterday the Labour market statistics were released today, and as I expected they have yet to highlight the slowdown in the wider economy. However, with economic statistics, looking at one months worth of data can be very misleading, especially when you fail to put it in the wider context.

Looking at the monthly data nearly all the data was good news for the UK economy. Unemployment was down, employment was up and the number of people claiming benefits was down. This looked like a continuation of a very successful period of labour market expansion.

Nevertheless, these figures hide the variations caused by end of year demand for employment in financial services and Christmas employment in the retail and leisure sectors.

I would expect to see in first quarter of 2008 being a much less impressive year for the labour market. With retailers likely to have suffered a very tough Christmas, employment in these sectors is set to fall. The banks and other financial institutions are also expected to cut employment. Citi has already announced planned cuts of around 20,000 jobs worldwide - many of these are likely to be in London.

What is of a greater concern is that these figures may delay decisive action by the Bank of England. Today's release indicated a pick up in the rate of wage inflation, which in turn will stimulate general levels of inflation. As such, with the prospect of increased inflationary pressures, the Monetary Policy Committee may decide to be more cautious about cutting rates.

Today's data is likely to be one of the last bits of positive labour market news in 2008. Tougher times have already arrived for many people, the data will catch up in February and March to prove this.

Things not looking up for next year

Some of the third quarter figures from the United Kingdom and the United States looked fairly positive. In particular the employment and the GDP growth figures looked pretty good without any real sign of the current credit crisis having a wider impact on the wider economy. However, don't be fooled the downturn is coming in both the UK and the US and very likely in the EU.

Early data from Q4 suggest that activity in both manufacturing and services has been slowing down in recent months. The view on the high street is that the consumer is losing confidence and are more than likely to put the breaks on spending - particularly as they have few savings to cover them over the slowdown.

The financial sector is far from over the worst of the sub-prime mortgage crisis, with a number of big banks still to declare just how much exposure they have had. This sector should expect more bad news, job losses and a much reduced pool for the Christmas bonus period.

The housing market is unlikely to see significant price falls at a national level but certain locations will see prices drop.

Therefore get prepared for next year, people will be losing jobs, wage growth will come under pressure and nothing will feel as secure. Make sure you shine and work and that your boss understands that to lose you to save money in a downturn is a bad move over the longer term. Things should get back to normal come the end of 2008, don't get stung in the meantime.

Sub-prime woes to hurt more than just the City Boys

To those who haven’t been around for the past couple of weeks the stock markets have been going through absolute turmoil. The fall out from the sub-prime lending market in the United States has had ramifications not only in the United States but across the global financial system. How long this crisis will last is yet to be seen and the wider outcome is yet to be known. However don’t be fooled into thinking this is not going to have an impact upon those outside the financial markets, it will.

To those who don’t know the current market turmoil has been created by a problem in the United States sub-prime mortgage market. The sub-prime mortgage market is where banks lend to people with a poor credit rating at a higher interest rate – in the hope of higher returns. However, the market became too loose and too overstretched. As base interest rates rose in the United States and the economy slowed, borrowers saw mortgage payments rise at a point when jobs were being cut and wage growth slowing. As a result defaults on mortgages increased rapidly.

So why didn’t the problem stop with the mortgage lenders? The problem has had wider consequences because those banks that lent in the sub-prime market packaged up some of this debt as a financial product and sold it to willing buyers in the international financial market. This was done as an insurance measure against widespread defaults. However, the selling of sub-prime mortgages went too far and rather than acting as an insurance against the risk, international financial markets have been pulled into the crisis.

The result is that financial markets have seen billions of dollars wiped off them in August. Several hedge funds have been closed and many of the major banks have suffered huge losses. This crisis has also led to a steep drop in confidence. Banks are no-longer willing to take the risk and lend to one another. As a result this has created a credit crunch where investors have not been able to borrow credit and as a result of a falling credit supply the cost of borrowing has risen rapidly. The Fed, the European Central Bank and other major banks have reacted strongly by cutting interest rates and by pumping credit into the markets. This has helped to temporarily stabilise markets but volatility remains high and no-one is yet saying things are in the clear.

Looking forward to the rest of the year and into 2008 it seems likely that the impact of the sub-prime market will run on and on in a number of different forms. Businesses are likely to find it increasingly difficult to find credit, especially the cheap credit they’ve been used to in recent years. This will reduce the ability of businesses to expand and capitalise on opportunities as and when they arise. Consequently business activity will be reduced, which will hit GDP growth.

The reduction in business activity will also hit employees. The first people hit are likely to be the City Boys who are not going to see the same bonus payments they have become used to. It has already been estimated that city bonuses may be reduced by up to 20 per cent in 2007. Jobs in financial services are also likely to suffer, with slowing headcount additions and even with a net loss of jobs.

However, with slowing business activity and reduced consumer demand from those working in financial services, the impact will be felt by every sector of the economy. There are few that will not be affected by the current financial crisis; jobs will be lost in all sectors. Those businesses which are not able to grow will not be able to increase the amount they spend on suppliers.

Those thinking that the sub-prime mortgage crisis is something that only those working in finance need worry about should think twice. Get ready for higher unemployment, slower wage growth and ultimately a difficult couple of years.

Article 1 - Tough times 2008

On the surface all is looking very rosy for the UK labour market if you’re looking for a job. Despite a huge inflow of migrant workers since the enlargement of the European Union the number of people claiming unemployment benefit has consistently remained below the one million mark in the last two years and has fallen by over 100,000 in 2007.

Nevertheless cracks are starting to show in the economy. Interest rates have risen five times since July 2006 and are likely to rise one more time by the end of the year. Higher interest rates are likely to hit both consumers and businesses alike as debt repayments become even more of a stretch. It should be noted that increases in interest rates take about a year to feed through to the economy so get ready for last years rate rises to start to hit!

Other weaknesses are showing. The slowdown in the US economy has been going on for most of the year without major consequences for the UK. The recovery in the major EU countries has helped to buffer the reduction in US demand for UK exports. However, the EU recovery is starting to look short-lived. The Italian economy posted very weak growth figures in the second quarter of year, whilst higher European Central Bank (ECB) interest rates are starting to hinder Germany and France.

Nevertheless on the surface it would seem that the slowdown is not having much of an impact on people’s day-to-day lives. Last week’s financial market chaos would have been a big headache for those working in the City of London or those with large share portfolios, but that’s a minority of the country.

The financial chaos should however start alarm bells ringing. It is not yet clear how the current mess in the international financial markets will play out, but if this turmoil continues then the cracks in the economy could well become holes for jobs to fall through. The financial crisis has exacerbated problem – few had been predicted that the United States could potentially move into recession until the events of last week.

It seems unlikely that the UK will suffer as much as the US. There are no credible analyst suggesting that the UK will enter a period of recession, but as the economy is squeezed by higher interest rates and as chaotic financial markets hit business confidence there will be those that will lose their jobs.

The first possible group to see job losses will be those working in the financial and business services sector in the City of London. Initial estimates had suggested that job losses in the City are likely to number a few thousand, but this number is likely to be revised upwards. The impact of this will be relatively limited to the London area.

The next sign to watch out for is a slowdown in consumer and business spending. With the financial markets looking wobbly and with higher debt repayments businesses will reduce their spending on goods and services, and also on headcounts.

Uncertainty in the financial markets leads to uncertainty in the business environment. Plans to invest will be hit as uncertainty increases the risk that they may not be able to afford the repayments in the future.

A slowdown in consumer spending is likely to follow. Higher interest rates will increase the cost of consumer debt repayments, primarily mortgages. However, this is likely to have a limited impact according to the Bank of England.

Consumer spending will also be constrained by the reduction in business spending. As businesses reduce spending employment growth will slow as will wage growth. With less money in their pockets the consumer will stay at home, rather than spending on the high street.

With business spending less on goods and services, those that supply those goods and services will have a reduction in turnover. With consumers spending less on goods and services these suppliers will also see reduced turnover. Lower turnover cause firms to fold or reduce costs; inevitably job cuts will be part of this process.

So when will this all come to a head? Most analysts suggest that 2008 will be the crunch point when the various factors come together to produce an economic slowdown. Expect to feel the pinch wherever you work, there are unlikely to be many sectors that don’t see an impact.

With this warning in hand I would suggest knuckling down and making sure your boss realises that you’re indispensable, even when business is bad! 2008 is going to be a tough year try to limit the suffering.