UK Unemployment

I have long been predicting an accelerating increase in the levels of unemployment, going back to November of last year, and more recently said this:

However, also expect the rate of rise in unemployment to increase more quickly in the coming months (original post here)

In my original essay (November) I pointed out that it was likely that the position on unemployment would be ameliorated by Central European workers returning home, but that this would not be enough to stop the rise in unemployment, a point reiterated in my later post.

Today the newspapers are announcing that 'UK Unemployment Jumps Most in 16 Years'. This headline, under normal circumstances would be a cause for worry. However, bearing in mind that the predicted return of the Central Europeans is taking place, the extremity of the situation is even worse than the headline appears. As ever, the statistics on the Central Europeans are lacking but anecdote suggests that they are returning home in large number - a trend likely to be accelerated by the fall in the £GB, as their wages will be worth relatively less.

What this means in real terms is that unemployment is going up, but levels of employment are going down faster. This is indicative of the dire straits into which the UK economy has plunged. However, the consequences are going to be far deeper than imagined. One of the main sources of revenue for the government is the tax receipts from income taxation (I include National Insurance as Income Tax, as that is what it really is), at just under half of all revenue. We can do some back of cigarette calculations as follows:

Let's say that the total tax take (all taxes) on an average worker being laid off, or returning home to central Europe, is a conservative average of £8000 per annum. If we take a conservative guess at 200,000 Central Europeans having returned home in the last six months or so, that gives us a figure of lost revenue for the government of £1,600,000,000 per annum. These job losses will not show up as unemployment, but in a drop in employment. Furthermore, as the economy turns down, the number returning home will certainly be increasing. We should also consider that many of these workers are young, single and healthy, such that their net contribution to the economy was extremely high. As such their relative net contribution was likely raising the average net contribution per worker on average, such that their departure will bring down the average net contribution. As such the impact of their departure will be greater than for example, the magical disappearance of an average UK worker will be.

To this, we need to add the increase in unemployment among UK workers, which do show up in the unemployment figures. As these workers will be claiming benefits their impact will be even greater than the return home of Central Europeans (If you read the above carefully, you will see that I am not contradicting myself). Not only do they stop contributing to government revenue, but they also become an additional cost for the government. In the case of July alone, the figures show an additional 20,000 workers becoming unemployed, and the figures suggest that the rate of rise is increasing fast, with July's figures exceeding forecasts.

In short, the situation for the governments finances are dire. I have not even mentioned the falling tax take from VAT, Corporation Tax and so forth. Basically, every type of revenue is plummeting.

What I have also not mentioned is another impact of the Central Europeans return home. Many of the workers will have saved a significant amount of money, as that was why they were working here in the first place (money to return home with). As such, each of those central European workers will be returning home with a significant lump of cash, and we might guess that the average savings per Central European worker at £3000-5000 per annum. If we were to guess at the average length of stay in the UK as two years, that would give a lump sum of money withdrawn from the UK economy of about £8000. This is the equivaent to the import of a small car. This is a big lump of money to be withdrawn from the UK economy, and will have even greater impact than might initially be thought, due to the multiplier effect. The multiplier effect means that the loss of this cash to the UK economy means that this represents a considerable loss of economic activity in the economy as a whole. This loss of activity will also translate into a further loss of revenue for the government.

The rise in unemployment and the drop in employment are just starting to accelerate significantly. I actually suspect that there will be a substantial number of people who are actually unemployed but not yet claiming benefits yet. I can imagine (and it is no more than that) that there will be large numbers of people who will be living on redundancy money and/or credit for a couple of months in the hope that 'something will turn up'. I can also imagine these people appearing on the unemployment roll in the next month or two. For this reason the rate of unemployment increase will lag the drop in employment by a 2-3 months. As such, the unemployment figures of today may not fully reveal the drop in employment of UK workers. Again, there is a high likelihood that the the situation is even more dire than the headline numbers suggest.

I do not think I am alone in realising the severity of the situation. I note that the Bank of England is increasingly gloomy, and is starting to accept that the economy is in real trouble. However, even with their newly discovered pessimism, they are still not recognising how bad things will get. The UK economy is sinking like a stone.

I keep on mentioning it, but the rise in unemployment is going to start the second credit crisis. If we look at the headline figures of 20,000 increase in unemployment in July, you can see the harbinger of this crisis. Defaults on mortgages have been steadily rising over the last six months, and that rise lags unemployment rises. If we think of those 20,000 people, many will have mortgages and significant personal credit exposure, and will start falling behind in payments in a very short while. With the majority of UK households heavily indebted, each rise in unemployment will see mounting losses for the banks. With no ability to recover their money through repossession of housing (as the value of the house will increasingly be worth less than the debt), each default will represent a huge loss. These losses will now be starting to hit the banks hard and, even as I write, there are probably panicked meetings being held in all of the major retail lending institutions.

As I keep on saying, the situation is getting to get much worse yet.....