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Unemployment Peaks in Lockdown Will be Extreme

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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.

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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.