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Four signs point to the double dip

The UK economy appears to have taken another turn for the worse

There has been a great deal of discussion about recovery recently. All is well, the economy is recovering, let the good times roll. It is even time for the Bank of England to start raising interest rates, says Simon Ward, an economist at Henderson New Star. He predicts that the Monetary Policy Committee (MPC) will start to raise rates from March. That seems unlikely.

The amount of slack in the economy (the output gap) remains substantial, and, even though inflation will rise, the MPC has made it clear it will look through that. Rates will likely remain unchanged throughout 2010 and possibly well into 2011 and beyond. The economist Roger Bootle has argued that rates will remain below 1 per cent for at least five years; as usual, he is probably right. It would be disastrous to raise rates or reverse quantitative easing any time soon.

The UK economy remains in the doldrums. It looks to me that it has started to take another turn for the worse. The first signs of a double dip are becoming apparent. This coincides with the rise of VAT from 15 per cent back to 17.5 per cent at the beginning of the year.

Lack of confidence

First, there has been evidence from two sources that consumer confidence has fallen quite sharply. Nationwide's Consumer Confidence Index recorded a 5-point decrease in December to 69 - its biggest fall since November 2008. The Expectations Index suffered a similarly significant drop, decreasing 8 points to 101 in December. The proportion of consumers who think the economic situation will be better in six months' time stands at 34 per cent, compared to 41 per cent in November. The proportion who think there will be many or some jobs available in six months' time dropped from 27 per cent to 25 per cent in December.

Supporting evidence was provided by the European Union's consumer confidence index, which also fell back in December. The largest decline came in the fear of unemployment series, which ticked up again for the first time in 2009.

Second, the latest report on jobs from the Recruitment and Employment Confederation and KPMG, despite headlines to the contrary, showed a clear weakening in the number of staff placed in permanent positions compared to the number a month earlier.

Third, the latest quarterly survey from the British Chambers of Commerce was markedly downbeat, especially in services, and provided no evidence of any robust growth during the fourth quarter of 2009. Indeed, David Kern, chief economist at the BCC, argued that "all the Q4 domestic indicators are disappointingly feeble, especially in the service sector".

Fourth, labour markets around the world continue to loosen. In the US, non-farm payrolls (a statistic and economic indicator released monthly by the US labour department) unexpectedly fell by 85,000, based on data collected from firms. Employment fell by 589,000 based on the household survey, which has a more expansive scope than the establishment survey because it includes the self-employed, unpaid family workers, agricultural workers and private household workers.

About 1.7 million Americans left the workforce between July and December - a 1.1 per cent drop, the biggest six-month decrease since 1961. The share of the population in the labour force last month fell to its lowest in 24 years. An exodus of discouraged workers from the job market kept US unemployment from climbing above 10 per cent in December. Had the labour force not decreased by 661,000 last month, the rate would have been 10.4 per cent.

Employment also fell unexpectedly in Canada. The unemployment rate in the eurozone increased from 9.9 per cent in October to 10 per cent in November. It was the first time that eurozone unemployment had reached double digits since the introduction of the single currency a decade ago. Indeed, over the past month, unemployment rates increased across the European Union, rising in Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Finland, France, Ireland, Italy, Latvia, Malta, the Netherlands, Poland, Portugal, Slovakia, Spain and Sweden. It remained constant in Germany, Hungary, Luxembourg and Slovenia and fell only in Austria. Unemployment also increased in Japan.

As John Donne noted, "No man is an Island entire of it self; every man is a piece of the Continent, a part of the main . . ." So is the UK labour market recovering, almost alone in the world? It seems unlikely, doesn't it? Our youngsters are the ones who would be especially affected if the MPC were to start raising rates any time soon, or George Osborne and David Cameron were to take leadership of the next government and start cutting public spending too soon.

The Prince's Trust, along with YouGov, conducted a survey between 8 and 16 December last year of 2,088 young people aged between 16 and 25. It proved a number of striking facts about their attitudes. Two-thirds of the respondents reported that they were happy most or all of the time. There are relatively small differences by region or by whether the youngster lives in the inner city, suburbs or a rural area.

Lost generation

But one group is strikingly different from the rest. Young people who are not in education, employment or training (Neets) were much less happy: only 40 per cent said they were happy most or all of the time. In comparison to other young people, Neets are significantly more likely to feel ashamed, rejected, lost, anxious, insecure, down and depressed, isolated and unloved. Neets were disproportionately more likely to say that they had turned to drugs and to say that their life had no direction.

According to the most recent estimates available, there are 1,082,000 young people aged between 16 and 24 who are classified as Neets. That is a staggering one in seven of the age group. Joblessness has a knock-on effect on a young person's self-esteem, emotional stability and overall well-being. Sadly, I expect we shall see an increasingly depressed and debilitated generation which, as a result, becomes decreasingly likely to find work and hang on to it in the future. The long, downward spiral of unemployment can leave young people prone to more severe mental health difficulties, drug and alcohol addictions, homelessness or worse.

It's about time that people who advocate fiscal tightening thought about the impact of their recommendations on the lives of real people.

David Blanchflower is Bruce V Rauner Professor of Economics at Dartmouth College, New Hampshire, and the University of Stirling

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

This article first appeared in the 18 January 2010 issue of the New Statesman, Palin Power