Despite a determined pursuit of austerity measures to bring down its deficit, the U.K. is experiencing its highest unemployment level in 15 years coupled with a recovery that the National Economic and Social Research Institute called the “weakest of any since the end of the First World War.”
The unemployment rate jumped to 8.1% from 7.9% in the three-month period through August.
Against that background, Adam Posen, policymaker at the Bank of England (BoE), which raised its QE last week, as reported by AdvisorOne, said in a Bloomberg report Wednesday that the stimulus measure was the “right place” to begin and that more would be done if necessary. Posen has been advocating for additional stimulus since October of 2010. However, Chancellor of the Exchequer George Osborne has said that he will continue the tightest fiscal measures Britain has seen since World War II.
Jim O’Neill, Goldman Sachs asset management chairman, was quoted saying of the unemployment numbers, “This is obviously bad news for the U.K. If I were a policy maker, I’d be a little troubled.” O’Neill added that the increase in unemployment may be because of “the fiscal tightening that is coming home to roost.”
Unemployment is not the only worry the U.K. has. After Bank of England Governor Mervyn King said last week that the stimulus expansion was a response to what may be the worst financial crisis ever, Posen said it was right to be concerned about turmoil in financial markets. “I’d be a fool not to be quite worried,” he added, about the potential impact on U.K. banks from the debt crisis in the euro area. He is not the only one concerned; on Friday Moody’s downgraded a number of British banks.
“We are doing everything we can to pre-provision, to know where the weaknesses are,” Posen said. “But if we saw major sovereign losses—losses on sovereign paper and then losses on euro-area banks—then that would be a material impact on the capital position of U.K. banks. ... If there is a major recapitalization of the European banking system, the U.K. has to be prepared to deal with that.”