Has economic growth translated into lower unemployment?

IN: Business news

The latest unemployment figures for the three months ending in July 2013 show that the clear signs of economic recovery are translating to a rise in the number of people in work, albeit at a slow pace.

undefinedThe Office for National Statistics (ONS) reports that the number of people in work has gone up by 80,000 since the end of April to take the number of people claiming Jobseekers’ Allowance down to 1.4 million, the lowest number since February 2009.

The number of people unemployed fell by 24,000 over the last three months to reach 2.49 million. This means the unemployment rate dropped from 7.8 per cent to 7.7 per cent.

In recent months the UK economy has seen improvements in the manufacturing, construction and services sector, with the combined purchasing managers’ index report for all three sectors reaching its highest level since records began in 1998.

This has prompted many economists to predict that the economy could grow by 1.0 per cent in the third quarter after recording growth of 0.3 and 0.7 per cent respectively in the first two quarters of 2013.

The fall in the unemployment rate takes on added significance because it is being used as the measure by the bank of England to assess whether interest rates need to rise under the policy of forward guidance on interest rates adopted by the Bank.

The Governor, Mark Carney said that when the rate falls to 7.0 per cent it will trigger a review of interest rates, not an automatic rise.

Mr Carney said that for the rate to fall to this level, it would require the creation of a net total of 750,000 new jobs, something he does not expect to happen until 2016.

However, the City and markets believe that the strength of the economic recovery could make the Bank act early than that in raising interest rates from their record low of 0.50 per cent and are pencilling in a rate rise sometime in 2015.

Chris Williamson, chief economist at data provider Markit, said: "The upturn in the labour market bodes well for the sustainability of the wider recovery, as more people in employment and rising wages should help boost economic growth further.

“The improvement also increases the possibility that unemployment could fall faster than the Bank of England expects, meaning an earlier hike in interest rates than 2016, as currently envisaged under the Bank's 'forward guidance’."

It will be interesting to see in the next few months if the economy continues to improve whether this leads to a bigger fall in the unemployment rate and leads to a rate review earlier than anticipated.

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