U.K. Jobless Claims Unexpectedly Rise as Labor Market Slows

U.K. jobless claims rose at the fastest pace in more than a year and job creation slowed, suggesting the labor market is succumbing to a fragile economic outlook.

Jobless-benefit claims increased 10,100 to 1.58 million in October, the most since September last year, the Office for National Statistics said today in London. The median of 28 estimates in a Bloomberg News survey was for no change. Employment based on International Labor Organization methods rose 100,000 in the three months through September, half the pace of the previous period, as a boost from the London Olympics began to fade.

Unemployment may begin rising in coming months as companies respond to a weak outlook by freezing hiring or cutting payrolls. Bank of England Governor Mervyn King said today the U.K. economy may shrink in the current quarter and signaled policy makers are ready to resume stimulus if needed by saying they had not lost faith in quantitative easing as a policy instrument.

“Because growth is still quite sluggish there will be sluggish employment growth, and the unemployment rate may edge up a bit,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc (RBS) in London.

The pound pared its advance against the dollar after the central bank cut its growth outlook in its quarterly Inflation Report and was trading at $1.5868 as of 10.58 a.m. in London, little changed on the day.

‘Positive Signs’

ILO unemployment between July and September fell 49,000 to 2.51 million, though figures prepared on an experimental basis showed an increase of 53,000 in September alone, the statistics office said. Long-term unemployment continued to rise.

There are “really positive signs” in today’s data, though “I don’t think any of us are complacent about the scale of the challenges that we face,” U.K. Employment Minister Mark Hoban said in an interview on BBC Television.

The jobless rate fell to 7.8 percent from 7.9 percent in the three months through August. The rise in jobless claims last month left the claims rate at 4.8 percent. In September, jobless claims rose by 800 instead of the 4,000 drop originally reported. It was the first back-to-back increase in claims since June and followed eight months of decline.

Olympics Aftermath

In London, jobless claims rose by 2,900 in October, suggesting volunteers and temporary workers hired during the Olympics are once again looking for work.

With economic output no higher than it was a year ago, economists have struggled to explain the strength of the labor market. Possible reasons include an increase in part-time work and self-employment. Downward pressure on wages meanwhile is helping companies avoid the need to shed staff by holding down labor costs.

“This is still a pretty strong labor market and it’s not easy to reconcile that with a picture of underlying growth being so weak,” King told a press conference in London today.

Average earnings grew an annual 1.8 percent in the three months through September, compared with 1.7 percent in the previous period. Excluding bonuses, pay growth was 1.9 percent versus 2 percent. That’s less than the rate of inflation, which surged to 2.7 percent in October, increasing pressure on household budgets.

Global Outlook

While the U.K. economy expanded 1 percent in the third quarter, indexes of manufacturing and services suggest activity is once again cooling as the euro-region crisis cuts demand in Britain’s biggest export market.

Figures tomorrow are forecast to show the 17-nation currency area is back in recession. Japan’s economy shrank last quarter and concerns are mounting over the $607 billion in automatic tax increases and spending cuts known as the “fiscal cliff” that will hit the U.S. in January unless lawmakers act. In October, the International Monetary Fund cut its global growth forecasts to reflect the gathering economic risks.

Flybe Group Plc (FLYB), Europe’s biggest regional airline, said last week it’s seeking to shave 20 million pounds ($32 million) from expenses and will examine all options, including possible job cuts from the 3,000-strong workforce.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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