Hamish McRae: Next year will be the real problem year for UK plc – not this one

The contrast could hardly be greater. On the one hand, there is the doom and gloom of the housing market and the prediction of 40,000 jobs in finance being lost. On the other, there is plenty of evidence that the economy right now is still growing at a decent rate. A huge amount of attention has been devoted to the former; not a lot to the latter. So let's first redress that imbalance and then try to reconcile these two opposing perceptions of what is happening.

There have been several bits of positive news. Last week, there were some strong manufacturing figures and an estimate by the National Institute that the economy was still growing at around a 2 per cent annual rate. This week we have had good results from Tesco, our largest retailer, though there were some weak sales figures from the British Retail Consortium, so no one should think that there isn't a squeeze out there. But the most interesting and to some people surprising numbers were the employment and unemployment figures out yesterday.

Not only is unemployment still falling but employment, in some ways a more significant figure, is still rising. Employers are not stupid, so why are they taking on more labour? They must think they will need it to meet demand for their services. It is true that unemployment tends to be a lagging indicator, reflecting changes in the economy after a few months. That, obviously enough, is because there is a time lag between the decision to shed labour and the time when people who are losing their jobs appear on the register. But employment is different. If that is rising, there must be demand. So it is worth looking at what is happening in a bit more detail.

There was another rise in the proportion of people of working age who are indeed working, and over the past three months another 151,000 people in jobs. In other words, employment is rising at a rate of 600,000 a year. That is a lot. The number of vacancies is up, the number of unemployed still falling, albeit slowly, on both the three-month labour survey and the one-month claimant count basis. The female participation rate is still shooting up and the total weekly hours being worked has recovered from a dip at the end of last year.

However you slice these figures, there can be no doubt that we still have a buoyant job market. We have nearly 30 million people at work in this country, more than ever before. Delve into the detail and you can see some tiny signs of weakness. For example, there was a small revision of the claimant count data for February, showing a rise in unemployment rather than as initially reported a fall. But this is not worth worrying about, given that it was reversed in March. So what on earth should be concluded from all this?

Well, I think there has been a deterioration in economic sentiment that has taken place since March, since the Budget in fact. There has certainly been a deterioration in sentiment in the housing market, for the supply of mortgages has become very tight. We very much need the rescue scheme for the lenders now being prepared by the Bank of England and the Treasury, which will allow banks to swap illiquid mortgage debt for liquid government securities. The high street? Margins have been squeezed savagely, but anecdotally it seems people are still spending if they perceive the price is keen enough, with Britain also having the most vibrant online consumer market in Europe.

At some stage, the higher fuel and food prices will squeeze the amount of money people have to spend on other things. At some stage, the higher mortgage payments people are facing each month is going to bite too. But there really is not much sign of this yet. I suppose, to generalise, people must feel that while they have jobs they can earn their way out of trouble.

Of course they are right. The switch that the country as a whole faces is to trim a couple of percentage points out of consumption and into savings for two years. If consumption, instead of rising by 3 per cent a year, merely goes up by 1 per cent, that is not too bad. Some families that are heavily indebted will face something tougher, but while there is income to service the debts, and while they don't have to sell their homes, they can scramble through. From a national point of view as well as a personal one, maintaining employment is absolutely key to getting through the global downturn.

So how should we reconcile the strong employment numbers with the evident distress in the housing market?

Lags are part of the explanation. There are lags in the way employers behave. That is obvious. There are also, and I think this is more interesting, lags in the way consumers behave. Just as it takes a while for people to realise that their house is not worth what it was worth six months ago, so it also takes a while before a squeeze on income results in a change in spending habits. In the US, it took about a year before distress in housing really changed consumer behaviour. That is really only happening now. If we follow the same glide path, expect our consumers to cut back in the autumn, not before. That plays to my view that next year will be the real problem year for the UK economy, not this one.

The other part of the explanation may be that this slowdown will not see the falls in employment (and rise in unemployment) of previous cycles. The burden will be taken on income, not employment. We will carry on having our jobs but will be paid less, in real terms, for our work, with real wages pared back by the rise in commodity, energy and food prices. There will be some job losses of course, most obviously in financial services. But exports, thanks to the lower pound, will do well. So too will tourism. That will feed through into employment. And we can drop interest rates, and will do so.

If this is right, and it is a very tentative argument, it is good news. Much better to share the burden of adjustment as widely as possible, and much better to enable people to work through their difficulties rather than consigning them to the dole queue.

We are not at all through the woods yet; in fact, we have hardly entered them. Squeezing down real wages is no fun for any of us. Those strong employment numbers will deteriorate in the months ahead. But while there is no such thing as a benign downturn, some downturns are more grisly than others and those strong job figures are a cause for modest cheer.