UK unemployment data poor, improvements are badly needed

Data today revealed that the UK unemployment rate has risen to 8.4%. Fewer jobless claimants emerged than expected, with only 1,200 claiming as opposed to  the 9,100 expected. This is scant consolation however, UK unemployment is at its worst level in seventeen years. So, what can the UK government do about it?

There are many measures than can and should be taken to address the UK’s chronic unemployment situation. Most obviously, the Bank of England should ramp up its quantitative easing programme, particularly with inflation likely to ease this year. This should hopefully increase bank lending and enable the private sector, specifically SME’s to pick up the slack that the public spending cuts are leaving in the job market.

We need to make the UK a more hospitable environment for employers, which means lowering and simplifying taxation and cutting out over-regulation, though the government’s hands are tied to large extent by EU law.

For the longer-term, youth unemployment needs to be looked at, which means improving the UK’s education system. It is widely accepted that we need to equip young people with the skills, training and experience that will make them essential to UK businesses moving forward.

Investment in infrastructure is another major opportunity, whether this is funded by cheap UK borrowing in the debt markets or preferably by attracting foreign investment; relations with China are building in particular. There could be huge job creation if projects in sectors such as energy and transport (e.g. high speed rail) could be initiated. House building was the driver of job-creation in the recovery from the Great Depression in the 1930's and this could be replicated; housing in London in particular is a real problem.

Unfortunately, the fate of the UK’s unemployed could well be out of domestic hands – so much depends on events in the eurozone. The risks of a financial collapse and European recession are growing every month. No amount of bold and creative measures to boost UK employment will be successful if the worst case scenario comes to fruition in the eurozone.

Richard Driver
Analyst – Caxton FX
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Morning report

Richard Driver, Analyst Tuesday was another more positive day for the euro in light of a far better than expected German sentiment survey and a positive Spanish bond auction. Portugal will be hoping for the same level of success in its bond sale today, though it may be found wanting. Today’s session brings the monthly update from the UK labour market; some mild improvements are expected but the situation remains distinctly gloomy. Elsewhere, nerves over Greece continue to ramp up.
STERLING/EURO: The euro found some favour after a staggering German sentiment survey, but Greek fears limited gains. A gauge of German economic sentiment improved at a record pace, which is astonishing given the diminishing confidence levels in the eurozone as a result of the debt crisis. A solid Spanish bond auction added to the improved sentiment. Portugal will be hoping the improved liquidity helped by the ECB’s cheap loan scheme will boost demand and keep yields down at an auction today. UK headline inflation came down sharply yesterday from 4.8% to 4.2%, the Bank of England has been forecasting a decline this year and this appears to be coming to fruition. Temporary factors such as VAT and high oil prices will drop out of the equation soon, which should bring UK inflation back down to the official 2.0% target. Consumers will be grateful but the pound does not stand to benefit, further QE becomes even more nailed on amid easing price pressures. This pair trades at €1.20.	FORECAST
STERLING/US DOLLAR: This pair traded sideways despite some very positive US manufacturing data, sterling gains look capped at $1.54. The Empire State manufacturing index climbed to a nine-month high yesterday, and we are expecting further strong data in the form of some industrial production data. Sterling is finding it tricky to bounce against the US dollar as the spectre of further quantitative easing looms next month. Sterling is trading at $1.5350 this morning, and we could see it test lower levels today.	FORECAST
EURO/US DOLLAR: This pair has made a couple of attempts at $1.28 but has failed to breach this resistance level, increasing Greece talks may weigh on the euro.   Fitch’s Ratings has chimed in with comments to the effect that Greece will default in late March. This fear will be a major driver over the next two months and should put the euro under a great deal of pressure. It is no secret that Greek bond restructuring talks are stalling badly. This pair has come well off its highs to settle around the $1.2750 this morning, we are looking for levels in both the shorter and longer-term.	FORECAST
STERLING/AUSTRALIAN DOLLAR: Sterling stooped to a 27-year low against the Australian dollar as UK QE expectations increase.   The two Reserve Bank of Australia interest rate cuts seem to have had a positive impact at consumer level, with a gauge of sentiment bouncing back from contraction last month. Low inflation firmed the view that the BoE will pump more money in to the UK economy, which is nearly always a negative for a currency. This pair is at record-low levels against the aussie dollar, but has at least bounced off lows towards 1.47, trading almost a cent higher this morning. This evening brings some important aussie inflation data, which could help determine the likelihood of another RBA rate cut.	FORECAST
STERLING/NEW ZEALAND DOLLAR: This pair continued its downtrend towards 1.90, but the risks off a pullback in the kiwi dollar are rising all the time. The kiwi dollar remains very much in favour, taking its lead from strong gains in Asian stocks for the past two sessions. Much depends on the ongoing Greek talks, hopes appear to be growing that a deal will emerge very soon, but we have been disappointed too many times to have much confidence in this. The kiwi dollar is looking pretty overextended and a retracement looks likely before long. In the short-term, eyes will be on Portugal’s bond sale today. It could well struggle to curry the same favour as Spain did yesterday.	FORECAST
STERLING/CANADIAN DOLLAR: Sterling traded sideways against the Canadian dollar yesterday, despite gains in US stocks and strong US growth data. The Bank of Canada met expectations yesterday by holding interest rates at 1.00% for the eleventh consecutive month. Global uncertainties are only going one way at the moment, so there was no chance of a rate hike. The Bank of Canada estimated that Canada’s economy grew by 2.4% last year, which is very healthy in the current environment. US data followed the positive trend yesterday, but the loonie will meet increasing resistance at these very strong levels against sterling. For now, this pair trades close to 1.56.	FORECAST
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