UK rate cut looms as more lose jobs

London: The number of Britons out of work and seeking benefits surged by the biggest margin since 1991 last month, raising the spectre of severe unemployment next year and increasing the chance of hefty Bank of England rate cuts.

BoE minutes released the same time as yesterday's official jobless data showed policymakers voted 9-0 for this month's 1 percentage point cut in rates, and considered even more.

A separate Confederation of British Industry survey reported the worst conditions for retailers in at least 25 years, adding urgency to the political debate on how to tackle a recession which is gathering pace ahead of a national election due within 18 months.

The number of unemployment benefit claimants rose by 75,700 in November, the tenth consecutive monthly rise and the biggest jump since March 1991, taking joblessness past 1 million, official data showed yesterday.

Claimant count joblessness now amounts to 1.072 million jobless or 3.3 per cent of the workforce, though the broader and more internationally comparable ILO measure adds up to 1.854 million and 6 per cent.

"The now sharply deteriorated labour market intensifies the pressure on the Bank of England to slash interest rates again in January," said Howard Archer, chief economist at Global Insight.

The BoE minutes reinforce the expectations that the Bank is likely to follow the US Federal Reserve in reducing interest rates to close to zero and will start having to look at other options to help bolster the economy and avoid disinflation.

The pound weakened to record levels of around 92 pence per euro, compared with around 74 pence at the start of the year. Investors see the UK as particularly vulnerable to the global downturn because of its large financial services sector and hefty consumer borrowing against the housing market.

Policymakers did not even think of lowering rates by less than 100 basis points, so worried were they by the downside risks facing the economy, the BoE minutes showed.

They did consider a bigger move which would have taken official rates below 2 per cent for the first time since the BoE was set up more than 300 years ago but decided against it for fear of surprising markets that had not priced in such a move.

Jobless fears

Unemployment numbers are normally a lagging indicator so the sharp rise in jobless figures - which come after a slew of companies announced redundancies - suggests an expected economic downturn could be more prolonged than many feared.

"The numbers look absolutely horrible. We are looking at a forecast of 3 million in 2010 or higher - rising every month next year and into 2010," said Amit Kara, an economist at UBS.

"To see so many job losses this early in the cycle is extremely worrying."

Announcements of job cuts have come thick and fast in recent weeks.

British bus and train operator National Express said yesterday it would cut up to 750 British jobs to cope with the worsening economic climate, and the jobs of 25,000 staff at the 815-store Woolworth's retail chain are under threat after the collapse of the company.

In the CBI survey, retailer sentiment for December sank to -55 from November's -46, more than expected and the worst since the series started in 1983.

Worse is almost certain to come. Bank of England policymaker David Blanchflower has forecast unemployment will rise above 2 million on the ILO measure by Christmas and peak above 3 million in 2010.

An ICM poll published by Britain's Guardian newspaper late on Tuesday showed that the opposition Conservatives' lead over Prime Minister Gordon Brown's Labour Party had narrowed to 5 percentage points from 15 over the past month.

Voters increasingly doubted the Conservatives would run the economy better, the poll showed.

"We are in for a period of prolonged pain," said Kara.

EU forecast: 20% of firms face default

Standard & Poor's forecast that more than 20 per cent of all European speculative-grade companies could default by the end of 2010 amid a deteriorating economy, difficult funding conditions and volatile financial markets.

S&P estimated that at least 60 European companies would default within the next 12 months, affecting up to 25 billion euros (Dh130.14 billion) worth of debt, followed by a similar amount affected again in 2010, making it the worst period on record for the region.

"Investors should be braced for a record number of defaults among European companies," said Blaise Ganguin, S&P's chief credit officer for Europe in a statement yesterday.

"In this environment, it is important for investors to focus not only on the probability of default but also on what they might recover in the event of default." The high-yield bond market has been shut to new issuance since the credit crisis kicked off in summer 2007.

The S&P report predicted a 10-fold increase in European speculative-grade defaults to between 60 and 75 companies in 2009. By comparison, the figure has increased to six defaults so far in 2008 from three in 2007.

The ratio of downgrades to upgrades is likely to rise to 10 to one for the fourth quarter, S&P said. The share of negative outlooks and placements on Credit Watch has risen to 32 per cent of the total from 17 per cent at the start of 2008.

Most leveraged buyout companies do not face refinancing pressures until 2013, but "managing liquidity and working capital will be absolutely critical to survival for more highly leveraged entities," S&P said.