A tougher 2008 in prospect

The year-end is the season for predictions, and of course the one thing that no-one ever manages to predict successfully is the unexpected. How many commentators do you remember forecasting major problems with the US sub-prime mortgage market - let alone the resulting global credit crunch - this time last year? (Neither do we.)

It appears that we're approaching the new year from something of a high water mark in the UK labour market. In the three months to October, the number of people in work was 29.29m - the highest level since records began back in 1971 - according to ONS figures. The number of jobs also reached a record high of 31.6m - the highest since comparable records began in 1959 - reflecting a rise of 63,000 over the quarter and some 287,000 up on a year earlier.

And while the unemployment figure rose by a modest 6,000 between July and September to reach 1.67m, the number of people claiming jobseeker's allowance fell by 11,100 in November to 813,000 - the lowest for 32 years. The unemployment rate remains unchanged at 5.4%, while ONS figures show that there were two-thirds of a million (667,000) job vacancies in the three months to October.

While some members of the Bank of England's monetary policy committee are worried that record levels of employment could drive up wage growth, others interpret the figures differently. Labour economist and MPC member David Blanchflower suggests that the data points to a softening labour market, with high levels of immigration increasing the supply of labour faster than demand has risen (thus keeping the lid on wage costs).

In short, all the signs would appear to indicate that that this particular revolution of the wheel has reached the top of the cycle. Almost every recent indicator of business confidence is distinctly gloomy, and one should never underestimate the power of sentiment in determining market conditions. You don't have to look far for examples.

According to the latest Business Confidence Monitor from the ICAEW, confidence declined for the second successive quarter to reach a two-year low (despite the fact that the economy is still growing at around 3%). Directors' confidence also plummeted by 20 points in the three months to October, with the latest IoD business optimism survey showing just 4% more optimistic about their companies' prospects than in the previous quarter. A Lloyds TSB study of more than 200 businesses turning over more than £1m also reflected waning confidence, while the Chartered Institute of Purchasing & Supply reported that growth - and confidence - were both at their weakest since the spring of 2003.

Consumer confidence, as monitored by the GfK/NOP barometer, fell for the fifth consecutive month to its lowest level for four years, while the Nationwide Building Society's own consumer confidence index just registered its biggest monthly fall for three and a half years. (Perhaps it's hardly surprising when organisations like HSBC are telling us that house prices in the UK are ‘overvalued by 30%'.)

In view of the latest data the CBI reckons we're in for a tough couple of years, having reduced its earlier growth estimate for 2008 from 2.2% to just 2% - well below the 3% we've enjoyed this year. The Confederation now expects unemployment to rise to 1.7m, having previously predicted its continuing decline. Other analysts are even gloomier, suggesting that the UK could be heading for its worst year for growth since the long upturn began back in 1992. Several forecasting groups think growth could come in at less than 1.8% next year, while Goldman Sachs has put the chances of an imminent US recession - which would undoubtedly have a serious impact on the UK economy - as high as 40-45%. All this leads Bank governor Mervyn King to describe the near-term outlook, in characteristically moderate terms, as "less benign."

Commenting on the latest ONS statistics, the CIPD's chief economist Dr John Philpott said: "The latest job figures look like a seasonable present to both the government and the Bank of England. Employment at a record high, job vacancies on the rise, the lowest claimant unemployment for a generation, fewer economically inactive people - all wrapped up with the added bonus of slower pay growth to ease inflation fears.

"However, without wishing to sound like Scrooge, we shouldn't get overexcited by these figures. Employment in the financial services sector, easily the main engine of jobs growth in 2007, is only just starting to feel the chill wind of the credit crunch. And with public-sector employment now clearly on a downward path, sources of job creation will be few and far between in 2008 as the economy slows."

When it comes to adspend for 2008, most experts don't foresee any growth to speak of, with the obvious exception of the online sector. Chris Williamson, head of economics at NTC Economics (which compiles the Purchasing Managers' Index as well as the IPA's Bellwether Report), reckons the effects of the credit crunch are already making themselves felt. He expects the job market to slow next year as companies seek to contain costs and curtail expansion.

"This will affect recruitment advertising, which accounts for 40% of the market," he says. "The Advertising Association was predicting in September that the ad market would grow by 3.8% in 2008, but adjusted for inflation that is almost flat. I do not see where even that small growth will come from. 2008 will be tougher than 2007 and I would expect a significant fall in ad expenditure in real terms."

Of course, the one thing about predictions is that nobody can be absolutely certain, as we said at the outset. (Economic forecasters were created to make weather forecasters look good, as the old saying goes.) That said, there's already a strong consensus that 2008 could be the toughest year for jobs for some time.

If the prospect is enough to make you reach for a seasonal drink, you could always cheer yourself up with a glass of the world's most expensive Christmas cocktail, launched recently by the Movida nightclub at £35,000 (yes, £35,000) a time. (If you'd rather make one at home, you'll need a generous measure of Louis XII cognac, half a bottle of Cristal Rose champagne, brown sugar, angostura bitters, a few flakes of 24-carat edible gold leaf and, er, an 11-carat white diamond ring to bung in the bottom of the glass.) Cheers!