Page last updated at 15:19 GMT, Wednesday, 15 October 2008 16:19 UK

How bad will unemployment get?

By Hugh Pym
Economics editor, BBC News

Things are looking grim in the jobs market.

Closing down sale sign
There will be few sectors of the economy untouched by unemployment

In recent months there have been some crumbs of comfort, with record numbers in work.

But those crumbs have been carried away by the financial storms.

It is hard for anyone, in government or elsewhere, to put a positive spin on the figures.

In the three months to August there was the biggest increase in the official unemployment figure (the wider measure in line with other countries) since 1991.

This of course was in the middle of the last recession.

Just as ominous was the slide in the numbers of people in jobs, the biggest since 1993.

These numbers are serious and indicative of the scale of the unemployment problem now facing the UK.

Two million jobless by Christmas, up from the latest figure of 1.79 million, now seems a realistic prediction (it didn't as recently as a month or so ago).

'Steeped in gloom'

So how bad will it be? There will be misery in many families around the country as jobs are lost.

The latest figures do not include the banking jobs shed in September, never mind the expected losses from the major bank mergers

There will be few sectors of industry untouched by the curse of unemployment.

Businesses associated with the housing market, financial services and leisure are the most vulnerable.

But, ominously, manufacturing is steeped in gloom too.

Exporters of products made in the UK were one of the bright hopes for the economy as the consumer area fell back.

It does not seem to have worked out like that.

Not so bad?

But let's keep things in perspective.

It was not that long since unemployment was last at two million, the spring of 1997 in fact. That was when Labour came to power.

Benefit queue in 1970s
Is unemployment heading for the worst levels in decades?

It may be politically awkward for the government if it can no longer highlight a lower jobless total as one of its achievements.

But many households will feel that if 1997 is as bad as it gets that is not so bad after all.

The UK still enjoys a lower unemployment rate that many leading competitors.

France and Germany's 7.3% do not look healthy next to the UK's 5.7%.

The British labour force has been seen as more flexible than others in recent years.

In that sense the UK may be better placed to cope with a world downturn that some other major economies.

And it's possible that if there is a recession it will be short-lived - V-shaped rather than U-shaped.

In other words we could go in and out of it quickly.

Safety valve

Unemployment could peak well below levels seen in the last recession of the early 1990s.

Previous downturns have been marked by rampant inflation, often fuelled by spiralling wage deals.

This time, although inflation has hit a 16-year high, pay rises have remained remarkably stable.

The latest labour market statistics have seen a fall in average earnings increases.

So, assuming inflation falls steadily, the Bank of England will be free to cut interest rates vigorously.

This may be the safety valve which prevents a prolonged and deep recession developing.

And yet… nobody quite knows how severely the world economy will be affected by the financial crisis.

Events have moved at breathtaking speed in recent weeks.

Economies can tumble downhill rapidly if confidence evaporates.

The latest figures do not include the banking jobs shed in September, never mind the expected losses from the major bank mergers.

It is not a breathtaking insight, but the next few months will determine whether the unemployment story is no worse than the mid-1990s or the nastiest in decades.

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