UK unemployment falls to 50-year low as Bank of England warns of 'dysfunction'

Bank of England will further bolster its emergency bond-buying plan, as it said the continuing rout in the gilts market posed a 'material risk to UK financial stability'

The UK's Office for National Statistics said the unemployment rate fell to 3.5 per cent over a three-month period to August, the lowest it has been since February 1974. PA
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Unemployment in the UK has fallen to its lowest rate in about 50 years as the number of people not working or looking for a job continues to rise.

The Office for National Statistics said the unemployment rate fell to 3.5 per cent over the three-month period to the end of August, the lowest it has been since February 1974, despite the continuing turmoil in Britain's economy.

The Bank of England was forced to step in for a second time in 10 days on Tuesday to further bolster its emergency bond-buying plan, which it brought in to stabilise the pensions system.

It came as a leading economic think tank said Chancellor of the Exchequer Kwasi Kwarteng would have to find spending cuts of more than £60 billion ($66.16bn) if he was to meet his target to get public finances back under control.

And the IMF warned while the UK’s economic growth could improve in the short term, it will sharply reduce in 2023 as consumer spending caught up with rampant inflation and higher interest rates.

The fall in the unemployment rate on Tuesday was somewhat of a surprise, having been expected to hold steady at 3.6 per cent, which it hit during the previous quarter.

However, there was a record rise in the number of people considered “economically inactive” owing to long-term sickness.

“The unemployment rate continues to fall and is now at its lowest for almost 50 years,” said David Freeman, the ONS head of labour market and household statistics.

“However, the number of people neither working nor looking for work continues to rise, with those who say this is because they are long-term sick reaching a record level.”

He said the number of job vacancies remained high after a long period of rapid growth.

The rate has now dropped back a little, “with a number of employers telling us they have reduced recruitment due to a variety of economic pressures”.

“However, because unemployment is also down, there continues to be more vacancies than unemployed people,” Mr Freeman said.

The number of UK workers on payrolls rose by 69,000 between August and September to 29.7 million, the ONS said.

In response to the latest labour market data, MrKwarteng said countries around the world were facing economic challenges "but today's statistics remind us that the fundamentals of the UK economy remain resilient, with unemployment at its lowest point for almost 50 years".

“Our ambitious growth plan will drive sustainable long-term growth, meaning higher wages and better living standards for everyone, and we are cutting taxes so people can keep more of what they earn," he said.

“But we know people are concerned about rising prices and that's why we're standing behind families with our energy price guarantee, saving the average household £1,000 a year for the next two years.”

UK Chancellor of the Exchequer Kwasi Kwarteng. AP

The economy has been in turmoil since Mr Kwarteng announced his tax-cutting mini-budget on September 23.

The pound plummeted, falling to its lowest level yet against the dollar, while the FTSE tumbled and the Bank of England was forced to step in to save the pensions system from collapse, all in a four-day period.

Base interest rates, which currently sit at 2.25 per cent, were predicted to soar above 6 per cent next year at one point, leading lenders to pull hundreds of products from the market.

The average two-year fixed mortgage rate is now sitting at about 6.3 per cent.

The Bank of England said on Tuesday it would further bolster its emergency bond-buying plan, which it brought in to stabilise the pensions system, as it warned the continuing rout in the gilts, or government bonds, market posed a “material risk to UK financial stability”.

The central bank will widen the scope of its UK government bond-buying programme to include purchases of index-linked UK government bonds amid concerns over another “fire sale” of government bonds.

It comes after the sell-off in government bonds resumed on Monday as investor concerns failed to subside, despite action by the Bank of England to double its daily bond-buying limit and Mr Kwarteng's move to bring forward his new fiscal plan and independent economic forecasts.

He announced on Monday he will unveil debt-reduction plans and independent economic predictions on October 31, rather than in late November, hoping not to spook markets further.

But long-dated gilt prices still tumbled, which sent yields on 30-year bonds soaring to 4.7 per cent on Monday — their highest level since the central bank was forced to step in last month.

"The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts," the bank said.

“Dysfunction in this market, and the prospect of self-reinforcing 'fire sale' dynamics pose a material risk to UK financial stability.”

It said its latest efforts would “act as a further backstop to restore orderly market conditions”.

UK Deputy Prime Minister Therese Coffey told the BBC on Tuesday she was confident that the public's pensions were safe after the Bank of England’s latest intervention.

In further bad news for the British economy, the Institute for Fiscal Studies think tank said on Tuesday it was not possible to deliver cuts on a required scale through efficiency savings and "trimming the fat" and that it would require major cuts to public services.

An analysis by the investment bank Citi found that the economy was set to grow by an average of 0.8 per cent a year for the next five years, far below the 2.5 per cent "trend" rate of growth Mr Kwarteng said he wanted to achieve.

The IFS said that on that basis, it would require a "fiscal tightening" of £62bn in 2026-2027 to stabilise debt levels.

In an online briefing to accompany the report's publication, IFS director Paul Johnson said that after 12 years of austerity, cuts on that scale were "extraordinarily hard to achieve".

The International Monetary Fund (IMF) said on Tuesday the UK’s economic growth could improve in the short term, but sharply reduce in 2023 as consumer spending catches up with rampant inflation and higher interest rates.

The slowdown of the global economy has intensified since April as it faces “stubbornly” high inflation, the IMF said in its latest World Economic Outlook report.

In the UK, the economy is projected to grow at a rate of 3.6 per cent in 2022, a 0.4 per cent upgrade from the IMF’s previous forecast in July.

However, growth will then fall sharply to just 0.3 per cent in 2023, the IMF said, as it downgraded its forecast by 0.2 per cent from a previous 0.5 per cent estimate. Just Germany and Italy will see weaker growth than the UK among the world’s advanced economies, with the IMF forecasting declines for both countries in 2023. Meanwhile, Russia’s economy is expected to contract by 2.3 per cent next year, the biggest fall of all the nations included in the projections.

Updated: October 11, 2022, 1:19 PM
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