With 2.6 million people now unemployed, Michael Hewson, market analyst at CMC Markets, assesses the impact on business.

With 2.6 million people now unemployed, Michael Hewson, market analyst at CMC Markets, assesses the impact on business.

Unemployment means that the growth outlook for the UK is fragile and that consumer spending will drop significantly. With 70 per cent of UK industry being services-based and driven mainly by customer spending, the future looks very uncertain.

The UK is renowned for having a high number of small businesses, but the majority of these are compressing their margins and losing staff, which is why you are seeing this unemployment. Public sector job cuts add to the concern.

The government has been mainly focusing on monetary policy, which is not enough. We have heard all about credit easing [creating money to buy corporate debt] but they can do a lot more. Business regulations should be relaxed and companies should be given incentives to employ.

Unfortunately, this is what governments have been historically bad at doing. Making changes to National Insurance would help, as would changes to the businesses rates. It seems simple to me – if you make it cheaper for start-ups, more people will be able to gain employment.

However, the overhang in Europe is having a chilling effect on the UK, and until that is alleviated, unemployment will continue to be a problem. We must remember that Europe is one of our key export markets and, despite recent optimism, the crisis will most likely not go away in the short term.

The bottom line is that politicians need to display more creative thinking, but they seem reluctant to do this. A lot of the red tape that surrounds employment and start-ups needs to be lifted.