Britain’s jobs market could be ‘canary in the coalmine,’ top economist says

Britain’s worsening jobs market could be a “canary in the coalmine” for the risks posed by high interest rates in major economies worldwide, including the U.S., a top economist has said.

Until recently, even the world’s most precarious economies had expected they would dodge recessions and avoid suffering widespread job losses, as central banks worldwide have hiked interest rates to yearslong highs in seeking to push down inflation.

But the Bank of England is now at serious risk of sparking widespread layoffs in the U.K. economy by failing to cut interest rates quickly enough, despite signs of a serious downturn in Britain’s jobs market, TS Lombard economist Dario Perkins said.

He explained that just two years ago, the U.K. was suffering from labor shortages as acute as those in the U.S. Now, the U.K.’s labor shortage problem is over. But the Bank of England has refused to cut interest rates.

This has seen Britain’s central bank keep interest rates at long-time highs of 5.25%, despite signs of an uptick in unemployment, as the Bank of England has instead focused on pushing down wage growth in its fight against inflation.

“My worry about the U.K. is that we are now beyond normalization, which means policy is too tight,” Perkins said in a note. “In fact, as labor shortages diminish and margins decline, a genuine recessionary dynamic can take over — people actually lose their jobs, which triggers a plunge in confidence and further job losses.”

The Bank of England’s refusal to pivot now risks seeing the U.K. economy miss the soft landing it was previously heading for. This, in turn, could see Britain heading into a genuine recession caused by the rebalancing of the labor market going too far.

“The U.K. labor market is more ‘flexible’ than many others, particularly those of the euro area. The ECB can afford to dither, without risking a deep recession. But the BoE doesn’t have that luxury,” Perkins said.

Parkins said the U.K. could now be the first “monetary canary” to croak as he warned similar situations could start to arise in other major economies elsewhere.

“The U.K. has seen a ‘rebalancing’ in its labor market that may have gone too far. Post-COVID normalization is turning into genuine weakness. This is a potential warning about what might happen elsewhere (even in the U.S.),” the former U.K. government economist said.