There were several answers put to this from the speaker and around the table which I found fascinating;

1. The UK had price-adjusted rather than quantity adjusted employment. In America – and I don’t know how much this may be because of regulation or culture – they tend to lay off the workforce rather than reduce their wages and bonuses
2. The UK, like the USA may have had a big ramp-up in property prices, but unlike in America, there was no construction boom. Construction workers are very easy to lay off and that had a big impact on US unemployment
3. The UK had a big increase in public sector workers over the last decade. Whether you agree with this or not, it’s certainly true that they were not laid off during and after the recession – in fact public sector employment actually increased so that soaked up a lot of people who might otherwise have been unemployed

But then does this mean that the UK is following the European model of employment behaviour?

No, if only because the diversity of Europe’s unemployment’s response is extreme.

Spain is actually far more like the USA. Spain had the mother of all building booms which collapsed and will take a long time to adjust. And Germany’s unemployment actually went down during the recession.

Back in April 2010, Angus argued on our Platform section   – The £1 trillion black hole – public sector pension liabilities – that the government has used too high a discount rate for unfunded public sector pension liabilities – now at 5.5% compared to 3-4% in some other countries. This means that when those UK public sector pensions become due, the unforseen liability could be as much as £1 trillion pounds.

I’ve been watching the stats on our website and this article has been viewed many, many times. Of course it’s great to see people reading your work, but it means so much more when they listen and act on it.

So following the EPC’s and Angus’s promotion of the article and the issue, we were pleasantly surprised to note in George Osborne’s speech last week the following words;

“. . .we will carry out, as the interim report suggests, a full public consultation now on the appropriate discount rate used to set contributions to these pensions“.

Last week I was at a policy wonks’ dinner and a very senior economist made the salient point that the 20th October 2010, will be the most significant date in the UK’s economic calendar for many years to come. He argued that it will set the tone for all debate on public spending and the size of the state for well beyond the life of the coalition and it’s hard to disagree.

Few then will envy the Chancellor, George Osborne his job when he presents the CSR to Parliament.

A range of opinion polls suggests it’s going to be very difficult to sell the CSR to the public who are used to an ever-expanding state.  And not least because voters seem unaware for all the ongoing media coverage of “cuts”, as John Redwood MP has pointed out many, many times to an unlistening world, expenditure is still rising and forecast to keep doing so, from £600 bn in FY 2009/1 to £693 bn in FY 2014/15.

That said, I couldn’t help but laugh when I found out how unpopular Greenpeace is in Greenland. The route cause of this is their opposition to seal-hunting which pretty much shut down one of their two export industries – seal furs. So I’m not surprised they’re not getting a good reception this time round.  And let’s face it, Greenlanders aren’t the sort of people to care what outsiders think of them – they are the only territory to have joined and left the European Union. I can just see Brussels Eurocrats choking on the audacity of that one !

Right now, the biggest industry in Greenland is prawn processing – so it’s only natural they’d want some diversity away from that.

So Greece – particularly, Ireland and Portugal are all considerably worse.  The UK has tentatively improved its position vis a vis Germany and Spain because of the sheer scale of the country compared to the other minnows, is one still to keep a close eye on.

One city expert tells me that because the EU/IMF aid package is in place for Greece and on-hand for Ireland and Portugal, default is not yet on the cards.  That certainly makes eminent sense. And yet, writing yesterday in Critical Reaction, Tim Congdon says in PIGS to the Slaughter? that the two key facts emerging are;

1. The PIGS’ banking systems have not – so far – been able to repay their ECB borrowings. If the banking systems are eventually unable to repay the loans, the ECB will suffer a loss.

2. The ECB has already incurred losses on the bonds it bought in May, because of the adverse yield movements already noticed.

These issues are bound to be raised by the five German professors who are testing the legality of the May support package for Greece at the German Constitutional Court. The losses that the ECB is now taking on its interventions to help the PIGS undoubtedly constitute a breach of the no bailout clause of the 1992 Maastricht Treaty. If words have any definite meaning, the German Constitutional Court must deem the ECB’s actions and the Greek rescue inconsistent with that treaty and therefore illegal. The Eurozone remains in great trouble.

N.b. M4 money supply – as explained by wikipedia here.

1. House prices – already falling again, on a monthly basis. There could be much worse to come if Capital Economics is right, a 5% fall this year, 10% in 2011 and 10% again in 2012. And NIESR is today talking about a real terms decline in house prices below inflation over the next 5 years, taking the average home back to 2003 levels. The bottom line is that house-owing consumers will be less inclined to spend if they think the value of their homes is going down, a lot, for some time.

2. Unemployment – the big surprise of the recession is how little it went up. We’re now at 7.8%. But there’s a lot of people working part-time who’d rather be working 9-5, or who took pay cuts to hold onto their jobs,  and with bank balance sheets still as weak as they are, there’s not much credit to fund investment in new jobs which would be normal at this stage of the cycle.

3. What’s happening in America – if you accept that the UK is around 6 months behind the USA in its cycle, then the slowdown in the US economy driven by US consumer sentiment and renewed housing worries is troubling indeed.

4. What’s happening in Euroland – not much good news from there either – some sort of breakup of the Euro is still on the cards, probably just postponed and growth is anaemic.

5. Sterling – there were high hopes that the pound’s fall in value of around 25% against the dollar and the euro which started in summer ’08 could help lead us out of recession with more competitively-priced exports. Unfortunately, the UK is starting to look like a relatively safe haven and Sterling is going up again. It’s quite possible before the end of the year that it may reach 1.75 against the dollar and 1.40 against the euro not because that’s what it’s worth but because all currency movements have a habit of overshooting. That will obviously hurt exports, but would reduce the cost of government debt as gilt yields are driven down by investors. Which makes me think, what is the precise trade-off on that one?

Anyway, if we’re going to have a negative quarter – and obviously, I’d much rather be wrong – I would bet on it happening in Q1 of 2011.

And then again, I do wonder a bit. When looking at the mobility of  individual wealth, you have to factor in inertia, family ties, moving costs and generally economically irrational behaviour. I keep thinking about Jeremy Clarkson’s insightful and as ever humorous piece  from a month ago, who despite his obvious disgruntlement with Britain declines to emigrate, stating;

You can’t go to Australia because it’s full of things that will eat you, you can’t go to New Zealand because they don’t accept anyone who is more than 40 and you can’t go to Monte Carlo because they don’t accept anyone who has less than 40 mill. And you can’t go to Spain because you’re not called Del and you weren’t involved in the Walthamstow blag. And you can’t go to Germany … because you just can’t.

You can’t go to Australia because it’s full of things that will eat you, you can’t go to New Zealand because they don’t accept anyone who is more than 40 and you can’t go to Monte Carlo because they don’t accept anyone who has less than 40 mill. And you can’t go to Spain because you’re not called Del and you weren’t involved in the Walthamstow blag. And you can’t go to Germany … because you just can’t.

The Caribbean sounds tempting, but there is no work, which means that one day, whether you like it or not, you’ll end up like all the other expats, with a nose like a burst beetroot, wondering if it’s okay to have a small sharpener at 10 in the morning. And, as I keep explaining to my daughter, we can’t go to America because if you catch a cold over there, the health system is designed in such a way that you end up without a house. Or dead.

Canada’s full of people pretending to be French, South Africa’s too risky, Russia’s worse and everywhere else is too full of snow, too full of flies or too full of people who want to cut your head off on the internet. So you can dream all you like about upping sticks and moving to a country that doesn’t help itself to half of everything you earn and then spend the money it gets on bus lanes and advertisements about the dangers of salt. But wherever you go you’ll wind up an alcoholic or dead or bored or in a cellar, in an orange jumpsuit, gently wetting yourself on the web. All of these things are worse than being persecuted for eating a sandwich at the wheel.

I suspect, anecdotally, that upper middle class  individuals can put up with quite a lot – it’s not as if Britain’s Tory Party cares for them. And for those that are wealthier, they can afford clever accountants and non-dom status.

The same is not true of companies, who are not the least bit emotional about crunching the spreadsheet and changing the location of their head office.  And be in no doubt, it is happening.

My fear is that just as the UK’s recovery post 1992 was significantly aided by an investment boom by companies coming in, it will be hampered this time by companies going out.

Like it or not, companies still control far more investment capital than individuals. That’s why what happens on corporate tax levels matters – a lot – to the recovery. The Republic of Ireland understood this early in the 1990s and despite all their woes today (thanks to the Euro) can look back on 15 good years of growth, prosperity and human capital augmentation that they would not have had without aggressively low corporation tax rates.

Would that the UK learn from Ireland and do the same.

Unemployment – is still only 7.8%. Very tough I know on those without a job but markedly better than 9.5% in the USA.  Professor David Blanchflower, a man who commands respect for going against the grain, challenging the BoE’s model and anticipating recession way before everyone else, earlier this year anticipated a peak of up to 4 million. Meanwhile, in most of Euroland, the picture is much worse. Ok, I know that all countries measure unemployment differently and there is no small amount of argument about the large numbers of Brits who are economically inactive but not drawing down benefits being included in the figures.  Still, it has to be a surprise that unemployment has not risen as fast as in previous recessions, of a much lesser severity. Is this because of Britain’s greater labour market flexibility or the last decade’s huge increase in unsackable public sector employment or an intangible increase in social capital between employers and employees where pay cuts and part-time work have been substituted for redundancy?

A devalued currency will increase exports – the pound has dropped by about 25%, but unlike in past recessions, there has been no nascent spike in exports. This may be because the components that make up the UK’s manufactured goods are often imported and added to the decline in manufacturing industry over the last 10 years, what’s left of it, component assembly, doesn’t really get that much out of  a cheaper exchange rate. Still, who wants to go into a recession with a strong and strengthening  currency like Japan, currently on the verge of a double-dip?

Manufacturing – some of us, myself included, thought that this recession was a watershed moment – a peak for financial services and maybe a re-weighting of the economy back towards manufacturing. But manufacturing has had a much tougher time of it than expected – in fact, it pretty much fell off a cliff.

Financial Services – would have got completely clobbered if it hadn’t been for the bailout and there haven’t actually been that many job losses in that sector. Time – and lots of it – will be the judge of the bailout’s importance and effectiveness.