U.K. jobless claims defy recession with unexpected drop

U.K. jobless claims unexpectedly fell the most in more than two years in August as the economy continued to create jobs in the face of a recession.

Unemployment-benefit claims fell 15,000 to 1.57 million, the Office for National Statistics said today in London. The median of 30 forecasts in a Bloomberg News Survey was for no change. The jobless total measured by International Labor Organization methods fell 7,000 in three months ended July to 2.59 million. Employment increased 236,000 to 29.6 million, the biggest gain in two years.

The continued rise in payrolls after three quarters of economic contraction has left the Bank of England and economists perplexed and raised concerns about the productivity of British workers. In the euro area, unemployment may reach 11 percent this year compared with 8.5 percent in the U.K., according to the European Commission. Some economists say Britain’s improvement is unsustainable and unemployment may rise in coming months.

“I wonder whether the strength in the labor market is as robust as the evidence suggests,” said Peter Dixon, an economist at Commerzbank AG in London. “Today’s data is not compatible with real economy numbers.”

In August, London accounted for 5,500 of the drop in jobless claims, suggesting the Olympic Games provided a boost in the British capital. The ILO unemployment rate rose to 8.1 percent in the quarter through July from 8 percent in the period through June.

Productivity puzzle

The pound remained higher against the dollar after the data were published. It traded at $1.6113 as of 10:59 a.m. in London, up 0.3 percent on the day. Sterling jumped 0.5 percent yesterday. It declined versus the euro, depreciating 0.3 percent to as low as 80.24 pence, the weakest level since July 5, after Germany’s top constitutional court today rejected bids to halt German ratification of the 500 billion-euro ($644 billion) European Stability Mechanism.

While the labor market is typically slow to respond to economic downturns as companies hoard skilled workers, economists are at a loss to explain its resilience. Explanations include a rise in self-employment as people struggle to find jobs and the pressure on wages, which is helping companies to hold down labor costs.

Average earnings rose just 1.5 percent in the quarter through July from a year earlier, down from 1.8 percent in the second quarter. Excluding bonuses, pay growth was 1.9 percent, compared with inflation of 2.6 percent.

‘Not complacent’

The fall in jobless claims last month left the claims rate at 4.8 percent. In July, jobless claims fell 13,600 instead of the 5,900 originally reported.

“We are not complacent,” Business Secretary Vince Cable told BBC television. “There are very real problems with people who are long-term unemployed.” Today’s figures showed the number of people without work for more than a year climbed 22,000 to 904,000 between May and July, a rate of 34.9 percent.

A separate report showed public-sector employment fell 235,000 to 5.66 million in the second quarter, although almost 200,000 of the decline was due to the reclassification of some colleges to the private sector. The switch also boosted private- sector employment, which rose 471,000 to 23.9 million.

Britain’s economy shrank 0.5 percent in the three months through June, the third straight quarter of contraction. The Bank of England sees the economy contracting about 0.2 percent this year.

Gauges of services and manufacturing improved in August, according to reports this month, indicating some signs of strength after the economy shrank in the second quarter. Still, Bank of England policy maker David Miles said yesterday that growth is “anemic,” which may limit any improvement in the labor market.

Industrial production

In Europe, industrial production increased more than economists forecast in July, as increasing output in Germany helped offset decreases in countries from Spain to the Netherlands.

Output in the 17-nation euro area advanced 0.6 percent from June, when it fell 0.6 percent, the European Union’s statistics office in Luxembourg said today. Economists had projected a gain of 0.1 percent, the median of 30 estimates in a Bloomberg News survey showed. From a year ago, production fell 2.3 percent.

In Asia, South Korea’s weakest inflation in 12 years may encourage the central bank to cut interest rates tomorrow for the second time this year, while the statistics office said that the country’s jobless rate was at 3.1 percent in August, unchanged from the previous month and less than economists’ median forecast of 3.2 percent.

Indonesia and the Philippines may keep their benchmarks unchanged at record lows tomorrow after price gains accelerated and New Zealand will leave its key rate at 2.5 percent, Bloomberg News surveys show.

A U.S. report on mortgage applications is due today from the Mortgage Bankers Association, a Washington-based trade group. The Labor Department will release import price data and the Commerce Department may say inventories at U.S. wholesalers rose in July.