The pound gets a pounding

[Naveed Yaseen]

By M. Ziauddin
The mighty pound is getting the pounding of its life. Consumer prices are tumbling. Real economy is in dire straits.

Recapitalised banks are waiting and watching. Stock markets seem still in a state of shock. Unemployment is surging. People on dole are increasing.And the Bank of England appears all set to cut interest rates further in January. The prognosis: deepening deflation. And no body appears to know how to get out of the jam.

The National Statistical Office data released last week said unemployment in Britain has surged the worst since 1991, taking the total number of people claiming jobless benefits to over one million for the first time in seven years, adding to the increasingly bleak outlook for the economy.

On a broader measure, unemployment is likely to top three million in the current recession like it did in the previous UK recessions. Joblessness is expected to continue to rise through 2009 and into 2010. One estimate has warned that half a million people are likely to spend their second Christmas in a row on the dole because of a rise in long-term unemployment.

The number of redundancies has also risen sharply as the effects of the economic downturn have spread beyond the financial and building sectors. The number of redundancies, during the three months to the end of October, increased by 41,000 to 180,000. The last time the level was this high was in 2002.

The figures revealed a disturbing rise in the number of jobless young people, aged 18-24, up by 55,000 in the three months to October to 597,000. This was the highest number since 1995. Longer-term unemployment among the young has also risen. The number of 18-24 year olds out of work for 6-12 months has increased by more than a third over the past year.

The outlook for jobs is expected to deteriorate further next year with the number of job vacancies falling by 49,000 to 562,000 during the three months to the end of November equalling the lowest figure reported since 2001. The last time it was this low was in summer 2003.

The biggest falls in vacancies were in construction, down by 39.3 per cent over the past year. Vacancies were down 32.5 per cent in manufacturing; 29.4 per cent in transport and communications, and 26.1 per cent in financial services

Meanwhile, fears over the looming danger of deflation were stoked by the Governor of the Bank of England on Tuesday last as plunging fuel costs triggered another sharp retreat in price pressures last month.

Mervyn King warned Chancellor Alistair Darling that the outlook for the economy had worsened in recent weeks, and highlighted a substantial risk that inflation will drop below one per cent next year.

Earlier, official figures showed that headline inflation on the consumer price index (CPI) dropped sharply again last month, to 4.1 per cent. This was down from 4.5 per cent in October, and from a record 5.2 per cent in September, to the lowest since June. The Governor’s warning came in his third explanatory letter to Alistair Darling since June setting out why inflation remains more than double the bank’s two per cent target.

Mr King is required to write a letter every third month while inflation exceeds its target by more than a full percentage point, and to explain what the bank is doing to return it to the target. With recession sending inflation plunging, he told the Chancellor that he expected it to return to the target in the first half of next year, and then “move materially below it later in the year”.

The waning danger from inflation and the growing risk of a deep recession has already seen the bank order drastic cuts in interest rates to an historic low of only two per cent. Mr King’s comments and the latest falls in inflation reinforced expectations of still deeper rate cuts next year.

Fuel was the driving force behind latest sharp reversal of inflationary pressure, recording its sharpest monthly price decline for at least a decade.

On the CPI figures, overall fuel prices plummeted by 8.3 per cent last month leaving them 3.6 per cent below their levels of a year earlier. This was the first time that the annual rate of fuel inflation has been negative since last August. Average petrol prices fell by 9.3p a litre between October and November, to 95.2p a litre.

While the government’s temporary cut in value-added tax (VAT) is soon set to wipe another 1.3 points off inflation rates if passed on in full by retailers, Mr King also made clear that the bank would set aside both this, and subsequent upward effects on inflation when VAT returns to its past level, when taking future interest rate decisions.

However, other factors limit the drop in inflation. Upward pressure came from food prices, with the cost of fruits rising by 10.8 per cent from a year earlier - twice the pace of increase reported in October. There were widespread increases in the cost of fruits such as bananas, pears, strawberries and oranges. This was blamed on the recent slide in the pound, which drives up import bills. Most fruits sold in Britain are imported.

Overall food price inflation remained in double digits, at an annual rate of 11.7 per cent, although it eased from an August peak of 14.5 per cent. People are paying nearly 18 per cent more for staple goods such as bread, milk and minced beef this month than they did a year ago, according to figures from a think tank.

“With employment dropping in Q3, it is clear that, as in the US, conditions in the labour market are deteriorating very quickly, threatening to feed back into yet further weakness in the housing market and economic activity in general,” said Jonathan Loynes, Chief European Economist of Capital Economics Limited, a London-based research firm. While Mervyn King stopped short of predicting deflation in his latest letter to the Chancellor explaining why inflation is still more than one per cent above its target, he did concede that it could fall below one per cent. As such, it is felt that the inflation outlook presented no obstacle to further cuts in interest rates.

http://www.dawn.com/2008/12/22/ebr17.htm