Unemployment in US and UK 'may be worse than in
Great Depression'
Coronavirus fuelling faster collapse than 1930s, warns
ex-Bank of England rate-setter
Richard
Partington Economics correspondent
@RJPartington
Fri 3 Apr
2020 16.05 BSTFirst published on Fri 3 Apr 2020 11.01 BST
Unemployment
in Britain and the US could surpass the levels reached during the 1930s Great
Depression within months as the coronavirus crisis crushes the global economy,
a former Bank of England official has warned.
In a stark
forecast as job losses mount around the world, David Blanchflower, professor of
economics at Dartmouth College in the US and a member of the Bank’s interest
rate-setting monetary policy committee during the 2008 financial crisis, said
unemployment was rising at the fastest rate in living memory.
Writing in
the Guardian, the economist said UK unemployment could rapidly rise to more
than 6 million people, around 21% of the entire workforce, based on analysis of
US job market figures that suggest unemployment across the Atlantic could reach
52.8 million, around 32% of the workforce.
“There has
never been such a concentrated business collapse. The government has tried to
respond but it has no idea of the scale of the problem it is going to have to
deal with. We make some back-of-the-envelope calculations and they are scary,”
he said.
Making the
assessment alongside David Bell, an economist at the University of Stirling,
the former Threadneedle Street policymaker said the collapse in activity amid
Covid-19 and the accompanying rise in unemployment looked to be at least 10
times faster than in the recession triggered by the 2008 financial crisis.
The
economists said that while government support in Britain for companies to
furlough workers could help to cushion the blow, unemployment would still soar.
While joblessness would rapidly rise, they cautioned it was uncertain how long
the impact would last and how quickly unemployment would come down. During the
Great Depression, records show unemployment hit 24.9% in the US and 15.4% in
the UK over several years.
The warning
shot for the two economies comes as business activity in Britain and the
eurozone plunges to the lowest levels since the start of closely watched
surveys more than two decades ago and as unemployment in the US begins to rise.
According
to the latest snapshots from the purchasing managers indices (PMI), which are
based on surveys of business activity, the private sector economy in the UK and
the eurozone collapsed in March at the fastest pace since records began in the
late 1990s.
The US
economy also shed 701,000 jobs, according to March data, far more than the
100,000 fall expected on average by economists. The unemployment rate rose to
4.4%, up from 3.5% in February. Initial unemployment insurance figures, which
come in advance of official figures, have suggested joblessness is already on
track to reach more than 10 million.
Stock
markets sold off on Friday as the prospect of lasting economic damage becomes
increasingly clear. The FTSE 100 closed down more than 1% at 5,415, as share
prices tumbled across Europe and the US.
The latest
health check in Britain from IHS Markit and the Chartered Institute of
Procurement and Supply (Cips) showed the onset of job losses last month as the
government in effect shut down large swathes of the economy.
The PMI
reading for manufacturing and service sector output, making up the vast
majority of UK growth, crashed to 36.0 in March on a scale where anything above
50.0 separates growth from contraction. Down sharply from 53.0 in February, the
reading was the worst since records began in 1996.
Duncan
Brock, group director at Cips, said: “It’s increasingly difficult to find the
words to describe the devastation as every region in the world fights to save
human life as the first priority. The likelihood of a global recession is now a
given, though its duration and severity has yet to reveal itself.”
Surveys of
factory output and service sector activity in the eurozone also showed the
biggest ever single monthly fall in March, setting the currency bloc on course
for a deep recession.
The IHS
Markit eurozone composite PMI plunged to 29.7 from 51.6 in February, the lowest
since the survey began in 1998.
“In one
line: horrid, hideous, harrowing … you get the picture,” said Claus Vistesen,
chief eurozone economist at the consultancy Pantheon Macroeconomics. “We are
struggling to come up with words to describe these numbers, which are now so
far out of any reasonable range that they are difficult to interpret.”
Although UK data lags behind the US, the evidence is
mounting – coronavirus makes 2008 look trivial
David
Blanchflower and David Bell
Fri 3 Apr
2020 16.00 BSTLast modified on Fri 3 Apr 2020 20.34 BST
‘We estimate that UK unemployment will rise by around
5 million workers from 1.34 million to over 6 million by the end of May and it
may well be much worse
There is no
doubt about it: the UK and many other European countries are already in a
depression. We think of a depression as even worse than a recession – as a
sustained, long-term downturn in economic activity in one or more economies. A
depression is generally deeper and longer lasting than a recession.
As the
daily drama of the Covid-19 count continues to scare everyone senseless, there
is another a key indicator of economic rather than physical health that we also
need to pay close attention to. That is how much unemployment there actually
is, how much it has increased already and how much it will increase in the not
too distant future. As everyone has hunkered down, many workers are not at
their jobs and unemployment is growing. The problem is we have no idea how much
it has risen already and how big any increase will be. The levels of
unemployment are likely to be beyond anything in living memory – as will be the
speed of the increase.
Social
distancing has had a catastrophic effect on otherwise viable businesses. Many
firms are closing. With no clear vision of the length of the shutdown or the
nature of the recovery, their future is uncertain. There has never been such a
concentrated business collapse. The government has tried to respond but it has
no idea of the scale of the problem it is going to have to deal with. We made
some back of the envelope calculations and they are scary.
We already
have some evidence of the extent of the collapse in business and consumer confidence,
which fell as much between February and March 2020 as they did in the year from
2007-8 just before the start of the Great Recession. The collapse in activity
and the accompanying rise in unemployment looks to be at least 10 times faster
than in the Great Recession of 2007-9. The Cips UK purchasing manager’s index
(PMI) for the period 12-27 March was published this morning and showed a record
fall exceeding the previous record seen at the height of the financial crisis.
Employment fell at the fastest rate since June 2009. Service PMIs for the
eurozone were even worse.
The Great
Depression is the benchmark for depressions. We only have annual data but that
shows that between 1929 and 1933, the US unemployment rate rose from 3.2% to
24.9%. Over this four-year period, the number of unemployed Americans increased
from 1.6 million to 12.8 million. In the UK, the unemployment rate rose from
7.2% to 15.4% between 1929 and 1932 and an extra 1.9 million people were put on
the dole. By comparison, the Great Recession of 2008-10 was a minor affair, at
least as far as unemployment was concerned. We have monthly data available
which shows that the US unemployment rate rose by five percentage points
between January 2008 and October 2009, while the UK rate increased from 5.2% at
the start of 2008 to 8% at the beginning of 2010.
These
increases in the unemployment rate cover periods of a year or more. The
Covid-19 pandemic will relegate all previous records for short-term increases
in unemployment into the third division.
We have a
pretty good idea week to week in the United States of what is going on with
unemployment. Every week each of the states reports how many unemployment
insurance claims there have been and the US Department of Labor (DOL) publishes
these estimates for the country. Nothing much appears to have happened in the
US in the first two weeks of March. There were 211,000 new claims in the week
ending 7 March and 282,000 in the week ending 14 March. But then the explosion
came: for the week ending 21 March, 3.3 million workers filed for unemployment
insurance; on Thursday 2 April the DOL reported that a further 6.6 million had
filed new claims for the week ending 28 March.
The latest
backward look at the US labour market for March was also published this morning
by the Bureau of Labor Statistics that covered developments up to early March.
It was truly awful, showing an unexpectedly large drop of non-farm payrolls of
700,000 and a fall of 3 million on another measure. There was also a rise in
the unemployment rate from 3.5% to 4.4% in a month – the biggest monthly
increase in 60 years. The data for April due to be released on 8 May will
inevitably be even more appalling. This will only cover developments up to
early March and is unlikely to pick up most of the increases that occurred in
the second half of March, but April, May and June are going to look horrible.
Sadly, in
the UK we have the least timely and least accurate labour market data in the
advanced world. The rise in applications for universal credit in recent days
looks devastatingly bad, but it only gives a rough guide to the scale of any
rise in unemployment.
Every other
country, including the US, will soon get data for March. The Office for
National Statistics (ONS) published data on 21 March for the period November
2019 to January 2020 – a statistic that now has no value at all. On 21 April we
will get data for December to February; in mid-May, January to March. It will
not be until July that we will get an unemployment rate based solely on the
economy under lockdown for March-May and by then it will be too late. Useless.
The Federal
Reserve of St Louis has produced an estimate of the unemployment increase in
the US based on the size of the occupations most of risk of being shut down by
Covid-19. The estimate is staggeringly bad. Unemployment in the second quarter
of 2020 in the US, they suggest, may top 32%. We have looked at estimates of
the UK occupational structure using similar methods, by judging which
occupations are most at risk from Covid-19, and assumed that in the short-run
around 50% of the workers in these occupations will lose their jobs. Based on
that, what is coming in the labour market looks horrendous.
We estimate
that unemployment will rise by around 5 million workers from 1.34 million to
over 6 million by the end of May, and it may well be much worse. That will take
the unemployment rate to around 21% – more than five times its current rate of
3.9% – and quickly. Some of these workers will be temporarily furloughed and
may return to work if and when there is a recovery, but this will only happen
if their companies are solvent and have a market to sell into. This becomes a
tougher call the longer the lockdown persists.
In short:
unemployment is set to rise in the UK by a lot. And we should be tracking this
rise on a daily basis, not six months after it has happened.
• David
Blanchflower is a professor of economics at Dartmouth College, New Hampshire
• David
Bell is professor of economics at Stirling University
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