Rising British joblessness points to recession

Shall we start with the good news? A December interest-rate cut is now all but nailed on, which will please mortgage borrowers. The bad news? The reason for this cut is that the jobs market looks increasingly like a pile of industrial slag dumped in an area of outstanding natural beauty.

Unemployment has hit 5 per cent for the first time in four years — the highest it’s been since Covid, and a figure that caught most economists on the hop. They didn’t have high hopes, but they weren’t expecting anything quite as bad as this.

The rising unemployment rate is a consequence of Rachel Reeves’s decisions, which are, I am sorry to say, symptomatic of a government that lacked a coherent plan coming into office and has consistently looked like it is on the back foot ever since.

Exhibit A is Reeves’s decision to raise employer national insurance contributions (NICs) — a tax on jobs, essentially — to deal with the hole in the public finances that she faced with her first Budget. The inevitable result of this is that firms, already facing higher costs from a sharply increased minimum wage, have hit the brakes and started firing rather than hiring in an effort to conserve cash and protect their margins. Some economists fear that another chunky increase in the wage will result in more of the same.

When this is combined with, and indeed exacerbated by, a slowing economy, the end result is exactly what we have now. Needless to say, this has only served to undermine the government’s stated aims: getting people into work and fostering growth. A small silver lining amid the dark and threatening clouds: the number of vacancies ticked up a little, by 2,000, to 723,000 between August and October. That’s the first improvement in more than three years. However, even that requires some gloomier context. The headline number of vacancies is now nearly 600,000 lower than the peak of 1.3 million jobs that were available during the spring of 2022.

Many of the jobs being created are also of low quality. Think tank the Work Foundation pointed out that the number of people on zero-hours contracts is close to a record, at 1.2 million, despite the government’s promise to ban them. Its Employment Rights Bill, heading towards royal assent, seeks to provide guaranteed hours to zero-hours workers who want them, after a reference period.

However, Rebecca Florisson, principal analyst at the Work Foundation, notes that the bill has done nothing to reduce employers’ appetite for this sort of arrangement. She fears that they will turn to other insecure ways of employing people, such as hiring freelancers, or using gig platforms, when the bill becomes an act. I suspect she is right. Another potential consequence of the bill is that it may add to employers’ reluctance to hire. Some have gone public to say this, while many more have privately confirmed it.

Those not fully immersed in the world of eco-stats might very well be wondering whether all this means we’re heading for a recession. To qualify for a recession, your economy has to have two consecutive three-month quarters in negative territory. The most recent one for which we have data is the second this year, so April, May and June 2025, in which UK plc expanded by 0.3 per cent. That was much slower than the first, when it grew by 0.7 per cent as manufacturers went hell for leather to export to the US ahead of Donald Trump’s tariffs. But since then, the monthly numbers have been anything but encouraging, with a small contraction in July (0.1 per cent) barely reversed in August.

Right now, we’re flatlining. The economy is sluggish. But it’s not yet shrinking. Most forecasters still expect the third quarter as a whole to end in the black — there’s a lot riding on September — with modest improvements to follow next year. However, another round of tax increases will inevitably attach a lead weight to Britain’s economic legs. There’s a lot riding on Reeves’s next Budget, and that R-word could at least be in play.

The fact that interest rates are probably coming down – helped by the fact that the figures showed wage settlements are still falling — will give the economy a boost it badly needs. Slim comfort for those at the sharp end of a chilly labour market: while lower interest rates are nice, they don’t help much if you don’t have any money coming in.