Britain’s vote to leave the European Union, and the subsequent impending recession will push up UK unemployment and cost almost 500,000 people in the country their jobs, say Credit Suisse.
This will in turn bump up unemployment substantially, erasing much of the work of outgoing prime minister David Cameron and his governments have done to lower unemployment in the so-called “Jobs Miracle.”
Here is the key extract from the analysts (emphasis ours):
“On the back of our forecast for GDP growth falling to 1.0% in 2016 and -1.0% in 2017, we can expect the unemployment rate to jump up to 6.5% by the end of 2017. This expected rise in unemployment is likely to squeeze nominal household incomes as wage growth takes a hit. This may occur with a lag, as has been evident by the puzzling sticky response of wages to falls in unemployment in the UK over the past few years.”
As it stands, the UK’s unemployment rate is at just 5%, according to the ONS, a record low since the current statistical period began. That 5% represents roughly 1.67 million people out of the 33.26 million people in the UK classed as being available to work. Based on a rough calculation, an increase in unemployment from 5% to 6.5% would leave 491,000 people currently in work out of a job.
It is worth noting that even if unemployment jumps to 6.5%, Britain’s unemployment rate will be substantially lower than in countries like France and Italy. Eurozone unemployment is currently at roughly 10.1%, something that has led notorious perma-bear Albert Edwards to describe it as a “toxic effluent running through the veins” of the continent.
Here is the chart, courtesy of Societe Generale:
In their note, reassuringly titled “Mayday! Mayday!” Credit Suisse’s Boussie et al. also note that they expect rising unemployment to trigger a slackening of the “robust” consumer sector, which in turn could cause even more serious problems for the economy.
The logic is simple — when people are worried about the state of their finances, they stop spending, and when people stop spending, that can signal serious problems on a macroeconomic scale. Consumers are the great rescuers of the economy, but if they stop spending, things could go very bad, very quickly.
Here is more from Credit Suisse (emphasis ours):
“Given our forecast of a recession in the UK economy in the next few quarters, we expect the unemployment rate to rise. Figure 14 shows the historical relationship between GDP growth in the UK and changes in the unemployment rate. As the chart shows, rises in GDP growth are often accompanied by falls in the unemployment rate. We ran a regression estimating the sensitivity of the unemployment rate to current and lagged annual GDP growth in the UK. Figure 16 plots the actual and fitted changes in the unemployment rate based on our regression. We can see a lagged response in the labour market to slowing growth so far — while growth has slowed to levels consistent with a stabilisation/ rise in the unemployment rate — the unemployment rate continues to fall.”
And here are figures 14 and 16, as mentioned above:
Credit Suisse’s research comes just a few hours after another report from the bank’s Global Equity Strategy team, which suggested that even before the referendum result, several data points were pointing to a coming recession for the UK. “We fear that, ahead of the referendum, two of the best lead indicators for UK growth — service PMI new orders and vacancy growth — were already consistent with a mild recession,” Garthwaite and his team argued.
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