Woeful Wednesday for economy

By Sumeet Desai Reuters - Wednesday, September 17 01:28 pm

LONDON (Reuters) - Unemployment jumped by its biggest amount in 16 years in August, factory orders fell at their sharpest rate in more than two years this month, and the country's biggest mortgage lender might soon be taken over.

Bad news on the economy flowed thick and fast on Wednesday and many experts say recession is now an inevitability and hundreds of thousands more would lose their jobs as a global credit crunch tightens its grip a year after it first took hold.

Minutes of Bank of England policymakers' Sept 3-4 meeting, also out on Wednesday, showed one of them wanted to cut interest rates by 50 basis points even though inflation was more than double the central bank's target, so worried was he about the economic outlook.

The rest, however, voted to keep rates steady at 5 percent for the fifth month running because the sharp fall in the pound risked keeping inflation -- already running at more than twice the Bank's two percent target -- high for longer.

Economists said the central bank would have to cut rates eventually though as this week's renewed turmoil in financial markets following the collapse of U.S. investment bank Lehman Brothers had made the economic outlook that much bleaker.

"In the face of mounting weak economic data and growing problems in the financial sector, we are becoming less convinced that it will be able to keep interest rates on hold for the rest of the year and the chances of a prompter cut are growing," said Philip Shaw, chief economist at Investec.

The number of people claiming unemployment benefit rose by 32,500 people in August, the biggest jump since 1992 and far more than the 22,300 predicted by analysts.

And the internationally comparable ILO measure of joblessness rose by 81,000 in the three months to July, taking the total to 1.724 million, the highest in nearly a decade.

David Blanchflower, the Bank policymaker urging lower rates now, has predicted this figure could hit 2 million by Christmas.

LLOYDS TAKEOVER?

Almost exactly a year after Northern Rock bank became the most high-profile victim of the credit crunch, shares in HBOS, the biggest mortgage lender, have been pummelled on concerns it may fall short of funds.

It is now in talks with Lloyds TSB bank to create a 28 billion pound mortgage giant, a person familiar with the matter said on Wednesday, amid speculation the government is helping facilitate the deal.

Prime Minister Gordon Brown can ill afford to have another bank go bust under his watch. His popularity is already in tatters as consumers face soaring bills and falling house prices and many in his own party are openly wondering whether he should remain leader.

Consumers face "potentially severe implications" from the deepening credit crisis, Financial Services Authority Chief Executive Hector Sants said on Wednesday.

Certainly, the central bank's hope that a sharp slide in sterling over the last few months should help the economy rebound next year is starting to look optimistic as weak demand in the global economy means exports may not pick up.

The Confederation of British Industry's monthly industrial trends survey's total order books balance fell to -26 from -13, the weakest reading since January 2006. The export orders balance fell to -25 from -9, the lowest since December 2001.

"The message from the CBI of weak output and moderating inflation pressures is supportive of our call for a November rate cut from the MPC," said Allan Monks, economist at JP Morgan.

(Additional reporting by Bate Felix, Matt Falloon, Christina Fincher, David Clarke and Steve Slater, editing by Mike Peacock)

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