Friday,
April 10, 2020 / 12:18 PM / By Fitch Ratings
/ Header Image Credit: The Times
Unemployment is likely to
surge rapidly during lockdowns to near-term peaks that will look extreme by
historical standards, as illustrated by the latest economic spotlight chart
from Fitch's Economics team.
The violence of the current shock to economic activity means precise monthly
forecasts of unemployment are impossible to make with any confidence. Instead
we have constructed some illustrative scenarios for peak unemployment based on
alternative percentage declines in employment during the lockdown shown in the
charts.


Our latest estimate is
that weekly GDP has fallen by around 20% in countries that have imposed
lockdowns to contain COVID-19. A shock of this magnitude is bound to have a
large impact on employment, with many economic models suggesting a roughly 0.3%
decline in jobs for each 1% shock to GDP.
Factors that could limit the immediate impact of
GDP declines on employment include adjustment costs, the capacity for firms to
adjust wages and the willingness of firms to endure a decline in profits if the
shock is seen as temporary. The various temporary job subsidy schemes that have
been announced could also dampen the shock. Nevertheless, falls of at least 5%
do not look unreasonable. Moreover, weekly unemployment benefit claims data
have already exploded in many countries, pointing, for example, to a 6% decline
in US jobs by late March.
The chart shows the peak in unemployment (both
in millions and in percent) that would be reached if employment levels in the
lockdown fall by 5%, 10% and 15% respectively, from their 4Q19 average (and the
labour force is unchanged). A 5% decline would see 1 million to 2 million job
losses in the large eurozone economies and the UK, while a 10% decline would
see 16 million job losses in the US. These numbers do not reflect the fact that
sectors hit particularly hard by the coronavirus crisis are employment
intensive.
These illustrations highlight near-term
unemployment peaks rather than new levels that are likely to persist beyond the
crisis and therefore are much higher than the annual average forecasts
published in Fitch's Global Economic Outlook. To the extent that firms maintain
unemployed workers on their books during the crisis through temporary lay-offs,
unemployment rates should start to fall back post-lockdown as the economy re-opens.
The US March labour market report for example, showed that "temporarily
laid-off" workers accounted for 1 million out of the total increase in
unemployment in March of 1.4 million. But near-term shocks this large increase
the risk of persistent increases in unemployment relative to pre-crisis levels.
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