Dealing with Britain's economic success
Clearly the economy has excelled compared to the Bank of England's forecasts, which assumed it would take longer for unemployment to fall this far. John Redwood MP explains what's going on
The excellent news on job creation in the UK has taken the unemployment rate down to 7.1 percent. It now hovers above the magic 7 percent level. That’s the level the Bank of England said it would need to reach before they would even consider a rise in interest rates.
Clearly the economy has excelled compared to the Bank’s forecast. The Bank thought it would take longer for unemployment to fall that far. They would have taken into account the new job creation rate, the rate of public sector job loss and the likely flows of migrants.
So why has it fallen more quickly?
The main reasons are good ones. The economy is growing faster than they thought. More of the new jobs are going to people already settled here and out of work. Some are now saying they were wrong about unemployment because productivity has disappointed. Is that true? Does it matter?
I have not been expecting productivity to do that well, given the continuing decline of North Sea oil and the loss of high end jobs in banking and financial services. I have commented before on how we have by accident and design been cutting our highly productive well paid activites. The former 50 percent tax rate, a high CGT (Capital Gains Tax) rate and a mature oil province were all going to cut incomes and productivity.
I wonder if something else is also happening. Could it be that output is understated, because more is being done in the informal or cash economy? By definition, the authorities cannot estimate reliably the amount of economic activity that some people do not put through the official books.
Now that we are fast approaching that 7 percent unemployment rate, the Bank of England will review interest rates. I expect they will conclude they need to keep short rates low for longer, as they will argue that at last inflation is coming down and is under better control. They will not want to do anything to curb the recovery.
Meanwhile, the markets have put up other interest rates. Government bond yields and some savings rates are edging upwards, away from the crisis levels that left savers with a rotten deal.
Saving does need to be more worthwhile. We are gradually getting there. Good jobs news is another step in that right direction.
Mr. Redwood's writing is re-posted here by his kind permission. This and other articles are available at johnredwoodsdiary.com
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