BOE Says Job Market Coped With Recession Better Than Forecast

By Jennifer Ryan and Scott Hamilton

Dec. 14 (Bloomberg) -- The Bank of England said the British job market has come through the recession better than it initially forecast and record low interest rates are helping consumers cope with their debt.

“Employment to date has not fallen by as much as we might have feared given the falls in output,” Chief Economist Spencer Dale said in the bank’s quarterly bulletin, published today. “Despite the severe recession, the proportion of households who reported difficulties keeping up with bills and credit commitments had fallen slightly.”

The report suggests policy makers see the recovery from the longest recession on record is under way. The Bank of England also said asset prices and credit conditions are shaking off the effects of the financial crisis and U.K. stock prices “do not look particularly elevated.”

Consumer spending accounts for more than three fifths of gross domestic product and Britain has lost more than 600,000 jobs since the recession began, taking the unemployment rate to 7.8 percent. Employment rose in October and claims for jobless benefits increased the least in 18 months, the statistics office said Nov. 11.

Higher unemployment has nevertheless eased wage pressures. Compensation agreements have “fallen sharply” this year as the average increase fell below 2 percent while some companies froze pay, the report said. In the third quarter, annual pay growth was 1.2 percent, compared with 3.4 percent in the same period a year earlier, easing inflation pressures in the economy.

“A substantial element of the workforce appears to have been able to protect their jobs by accepting slower wage growth,” Dale said.

Record Low

The central bank held its key interest rate at 0.5 percent last week and kept its bond-purchase program at 200 billion pounds ($325 billion) to ensure the recovery.

Low rates have made borrowing more affordable and helped more U.K. households meet debt payments, the bank said, citing a survey it conducted with NMG Financial Services Consulting from September to October.

Central bank policy has underpinned an improvement in credit markets and has also spurred demand for riskier assets, the bank said. The benchmark FTSE-100 Index has gained about 50 percent from its March low.

Bond purchases are “likely to have boosted asset prices by encouraging portfolio rebalancing toward riskier assets and reducing required risk premia,” the report said. “Despite their rapid rise since March, the level of U.K. equity prices did not look particularly elevated compared with long-run averages of simple valuation metrics.”

‘Fragile’

Still, investor confidence is vulnerable, the report said. Royal Bank of Scotland Group Plc was the biggest underwriter of loans to Dubai World, the state company that roiled markets last month when it tried to rescheduled debt payments.

HSBC Holdings Plc has the most at risk in the United Arab Emirates, JPMorgan Chase & Co. said in a Nov. 27 report.

“Sentiment in financial markets remained fragile,” the Bank of England said. The report cited a “renewed period of market volatility linked to worries about the possible wider implications of the potential default of the Dubai World investment company.”

The pound’s 20 percent drop in the past two years against a basket of trade-weighted currencies hasn’t helped lower the price of exports relative to imports, the bank said. Since the middle of 2007, export and import prices have both increased by around 15 percent.

“The recent stability of the U.K. terms of trade reflects the fact that sterling import and export prices have risen by similar amounts and by only a little less than the overall exchange rate depreciation,” the report said. “But if the rise in export prices is persistent, then this will create an incentive for rebalancing within the U.K. economy.”

To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net.