Britain ‘facing end of its jobs miracle’
THE boss of Britain’s biggest recruiter has warned its jobs miracle and the return of real wage growth are in jeopardy as mounting fears in the City over a no-deal Brexit sent the pound sliding to a two-year low.
James Reed, chairman of Reed, revealed the online recruitment giant saw the biggest fall in job vacancies since 2010 in June, a canary in the coal mine he believes could signal the economy is “heading for a recession”.
The UK’S jobs boom – a bright spot for the economy since the EU referendum – “might well have ended” and is “waning not waxing”, he told The Daily Telegraph. “Worrying storm clouds are forming around the UK’S job market,” he added.
The labour market had held firm in the face of Brexit uncertainty but job creation has slowed sharply in recent months. Mr Reed fears that decadehigh wage growth “might end if the jobs market goes backwards” as businesses turn cautious ahead of the next Brexit deadline.
The recruiter saw job vacancies plunge 7.4pc year on year in June, a move Mr Reed believes will be a leading indicator for the stuttering labour market. “After the Brexit vote we were the first to say job numbers are still growing and now we’re saying they are going backwards.”
Mr Reed sounded the warning on the jobs market as no-deal Brexit worries mounted on currency markets.
The pound tumbled to its lowest level against the dollar in more than two years after Boris Johnson fuelled no-deal jitters in the City by saying that the Irish backstop will be scrapped in any agreement with the EU. Sterling sank as much as 0.9pc to $1.24. The latest slide was its biggest since March and the pound is now the worst-performing currency in the last 12 months.
Stephen Gallo, of BMO Capital Markets, said investors “have been gradually assimilating the notion that there is ‘no easy way out’ of Brexit”.
‘After the Brexit vote we said job numbers are growing and now we’re saying they are going backwards’
Get ready for a humdinger of an economic shock. That in any case is what policymakers at the Bank of England and the Treasury are doing. The chances of a no-deal Brexit have increased markedly over the past couple of weeks. In the course of the Tory leadership race, positions have hardened; Boris Johnson, who is virtually certain to win, has left himself no ladder down which to climb. Come Oct 31, it’s “do or die”. Unequivocally, he is committed to a no-deal exit should agreement on new terms prove impossible.
Even for someone as skilled at changing his position as Boris, the sort of volte-face he would now be obliged to perform to avoid no deal would therefore be a virtual impossibility. So unless Parliament can find a way of stopping such an outcome, that’s where we appear to be heading. Brussels has indicated a willingness to grant another extension, but won’t alter the Withdrawal Agreement in the manner Mr Johnson demands. On both sides, it’s no surrender.
Worse, from the perspective of those hoping for concessions from Europe, significant elements of the European establishment now actively seek a no-deal Brexit, notwithstanding the economic harm it would inflict on Ireland in particular, but also to significant elements of the rest of the European economy. Because the UK is so much smaller than the European whole, they figure, the relative harm to Britain would be much greater, eventually forcing Britain back to the negotiating table to beg forgiveness.
If on the other hand Parliament does succeed in blocking the no-deal route, then we are into a general election and/or a second referendum. Again, the chances of exiting the European Union with no transitional arrangements in place would be high.
Such an outcome may indeed already be largely priced into the value of sterling, which is again on a trade-weighted basis close to the lows
it reached in the immediate aftermath of the referendum.
Hit by the actuality of no deal, it is therefore possible that the pound wouldn’t fall a great deal further. Already there are tentative signs of international investors moving money back into UK assets after the outflows of recent quarters, this on the old investment saying that the event itself is often a good deal more benign than the anticipation.
As it is, the short-term impact of a sudden death rupture with Europe is completely unknowable. We understand quite a bit about the benefits of economic integration, but there are few precedents for the disintegration now in prospect. Scenario modelling has therefore tended to quantify the known integration benefits, and then reverse engineer them.
But although in practice things may not be as bad as this modelling suggests, it is virtually impossible to believe, as some Brexiteers still seem to, that you can fundamentally upend 45 years of progressively more integrated trade with no economic harm at all. Boris therefore needs to start thinking pretty soon about that Churchillian speech – “I have nothing to offer but blood, toil and sweat”. The message to date, that it will all be fine, isn’t at all credible. Here’s a simple example of these cliff-edge effects. Bizarre but true, Europe’s largest
‘Britain is a very flexible economy, so over time, the changes needed might be possible. But not overnight’
manufacturer of mozzarella, Glanbia Cheese, makes the stuff not in Italy but at facilities in North Wales and Northern Ireland. The bulk of its output is exported to Europe on wafer thin margins, mainly for use in pizzas.
In the process of making the cheese for Europe’s pizzas, Glanbia consumes roughly a fifth of all Welsh milk output. Absorbing a 40pc European agricultural tariff would be quite a challenge. Glanbia is a joint venture between two international behemoths; if European markets become obstructed, it cannot simply realign by switching its markets to the US, because that market is already well served by one of its joint venture owners. An offsetting US free-trade deal therefore won’t help.
These same challenges apply to a very substantial part of UK manufacturing. It’s not so easy to switch markets. Britain is a very flexible and adaptive economy, so over time, the structural changes needed to redress the balance might be possible.
But not overnight. Shifting capital and labour to alternative markets won’t happen quickly. It is just about conceivable, I suppose, that in the immediate turmoil of a no-deal exit, both sides might quickly agree to begin again and fairly rapidly reach a mutually beneficial accommodation. But in the acrimony of such a divorce, where Britain refuses to pay the money, this seems unlikely. The dislocation could therefore go on for some time.
Personally, I wouldn’t take the Bank of England’s nightmare scenario warnings on the short-term hit – where the economy shrinks by 8pc and house prices fall a third – too seriously. But nor were they ever intended as a new front in Project Fear. To the contrary, they were a deliberate exaggeration – an attempt to reassure that in all circumstances the banking system could survive a no-deal Brexit so that we can be confident that whatever negative consequences do arise, in themselves they will not transmogrify into a full-scale banking crisis.
All the same, the hit to confidence, investment and consumption could be considerable, especially in circumstances where we see long queues developing at ports, and emerging shortages in key medicines, goods and foods. So how should policymakers respond? By cutting taxes, spending more, easing capital requirements on the banks, and reducing interest rates, they can be reasonably effectively in countering the shock to demand.
Supply side effects will unfortunately be much more difficult to address, as capital and labour adjust to the reality of a very different trading environment. Large scale closures and layoffs would undermine consumption, potentially triggering a self-reinforcing spiral of economic contraction.
Yet as I say, we just don’t know until we try it. This is both a blessing and a curse for those who advocate a clean-break Brexit. On the one hand, it enables them to say “hold your nerve; sunlit uplands lie beyond the fog”. “Vanishingly inexpensive” is how Boris Johnson describes a no-deal exit.
But on the other there is the all too plausible possibility they are wrong. Blaming establishment, pro-remain forces, or an unreasonable EU, will only get them so far by way of excuse if things go awry. Boris promises salvation; he now faces the almost hopeless task of delivery.