MercoPress. South Atlantic News Agency

UK “very likely” in recession; 11–year high unemployment

Unemployment in the United Kingdom hit an 11-year high as the Bank of England signalled that interest rates could plunge to record lows to lift the economy out of recession which is “very likely” already in recession.

Official figures for the three months to September showed 1.82 million people out of work - up 140,000 on the previous quarter and the highest since the end of 1997. Meantime Bank of England Governor Mervyn King warned of the gloom ahead and said "the world had changed" in the wake of September's financial crisis. Economists said the BoE would cut rates further - below the all-time low of 2% - to avoid the UK sliding into a Japanese-style deflationary spiral as prices plunge in a recession. Interest rates are already at a 53-year low after the Bank slashed them to 3% and need to fall further still to meet inflation targets, its forecasts showed. The UK economy was "very likely" already in recession and could contract by 2% year-on-year in early 2009 unless rates fall, the BoE warned. "We are moving into very difficult times and people should be concerned that we are moving into very difficult times, but that isn't to say we won't get through it," Mr King added. Graeme Leach, chief economist at the Institute of Directors, warned unemployment could peak at around 2.8 million in 2010. "For the next 12-18 months the only way for unemployment is up. The UK labour market is about to suffer the consequences of the once-in-a-generation financial crisis," he said. The UK government doubled spending on a "rapid response" unit to help people find work as unemployment edged closer to the politically-sensitive two million mark. Employment minister Tony McNulty said funding for the rapid response service was being doubled to £6 million to give extra support to those hit by redundancies. The unemployment rate is now 5.8%, the highest since early 2000, while the number of people claiming jobseekers allowance rose by 36,500 last month to 980,900 - the worst monthly increase since 1992. But the grim figures do not take into account recent job loss announcements, including news of more than 5,000 cuts by firms including Virgin Media, Yell, Taylor Wimpey and GlaxoSmithKline. Answering accusations that the Bank's Monetary Policy Committee (MPC) had been too slow to act to cut rates, Mr King defended the current framework, saying: "I think it's worked well and I think it will continue to work well. It is always possible to set policy with the benefit of hindsight... there is no way in which the committee can have perfect foresight." UK Consumer Prices Index (CPI) inflation is currently more than double the official 2% target at 5.2% but is set to fall sharply next year as food and energy prices fall back and recession hits demand. The wider Retail Prices Index benchmark is "very likely" to turn negative next year as mortgage interest payments fall, the Governor added.