Investment Tips
03/04/2020
Impact of Unprecedented Levels of Unemployment During Covid-19 Crisis
Ray Calleja

An article written by Ray Calleja: Head – Private Clients, MeDirect






Over the last few weeks we witnessed the swift decline in stocks and the start of the coronavirus pandemic. Volatility has been the name of the game. We did see some days where stocks try to rally back after their free fall but the situation is still developing and there is still a long way to go before things start to get back to normal again. Some positive news came from the Asian markets, which have been gaining strength as the number of new cases and fatalities slowly began to drop in that part of the world.

The U.S., on the other hand, is still coming up with new estimates every day about the spread of COVID-19. Last week, as stocks rallied, there was uncertainty about how many people would be impacted. Congress and then the senate approved a $2 trillion stimulus package and hundreds of billions of dollars in monetary policy pledged to help the economy. Earlier this week we learned that there are over 200,000 cases in the U.S. and the number of fatalities could reach 240,000. Investors did not like that news and the markets fell again.

In this article we will take a closer look at one of the most damaging aspects of this pandemic – rising unemployment. In just the last two weeks, more than 10 million Americans have filed for unemployment, according to the Labour Dept. That wipes out nearly all the job gains made since the 2008–09 crisis. Thankfully it is expected that many of those will come back once this health crisis abates, but some industries could have been changed permanently by this pandemic.

Economists expect a loss of at least 100,000 jobs in the US for March, but it could be much worse. The next few months will reveal the extent of the damage to the labour market as the Federal Reserve says some 43 million Americans may lose their jobs in this crisis. That's an incredibly big number and it reflects the size of the American workforce, which stood at 143 million people in February.

The consolation is that the US has seen unemployment shocks before and bounced back. In 1956 during the Steel Strike more than 800,000 people lost their jobs then hiring came back very strongly.

In Europe at least one million people have lost their jobs during the past two weeks according to the latest data from the European Trade Union Confederation (ETUC). The startling figure comes from reports submitted by trade unions across Europe, and only includes contract workers who have applied for unemployment benefits. The International Labour Organization estimates that almost 25 million jobs could be lost worldwide due to the coronavirus pandemic. 

We have never seen the global economy shut down in such a co-ordinated way in such a short period of time. As a result a large number of people have lost their jobs at the same time. And that is how unemployment figures have risen so dramatically.

And since this is very significant that is why we are seeing so many stimulus packages in the biggest economies across the world including all G20 countries. America’s stimulus is the biggest in the world at 10% of its GDP. This is a reflection of how significant a crisis this is and it is no wonder that world governments are acting as decisively as this. They are making different forms of funding to the system and to businesses to try and avoid companies going to the wall and ultimately save jobs.

Governments across Europe are using public money to try to secure jobs through the crisis by paying or reimbursing companies that have seen their revenues dry up. Their number one goal is to keep employees on the payroll so they can resume working when businesses re-open.

This week the president of the European Commission, Ursula von der Leyen spoke about the EU’s plans to borrow and spend €100bn to stop firms in the bloc laying off staff during this pandemic. The EU’s executive branch is proposing to borrow from the international markets and make loans to member state governments to allow them to fund short-time working schemes, under which employees work reduced hours with some of their salary paid by the state.

The world has learnt its lessons from the 2008/2009 financial crisis and that led to a structural change in the banking system. There is nowadays a much better capitalised banking system, much better than there was in 2007. It is therefore expected that the impact of the coronavirus crisis on the banking sector will be manageable this time.

As the virus crisis continues to unfold, it is clear that the necessary responses that are required will continue to be taken and eventually there should be a recovery.

These temporary packages come at a steep cost to the taxpayer but, if successful, they will help economies recover more quickly when the outbreak recedes.

Experts don’t think that the world will be in a permanent slump but people just don’t know when that recovery is going to happen. However, the significant level of the stimulus that is being provided across the globe should match the significant increase in the unemployment figures that we are witnessing just now.

 


The above is for informative purposes only and should not be construed as an offer to sell or solicitation of an offer to subscribe for or purchase any investment. The information provided is subject to change without notice and does not constitute investment advice. MeDirect Bank (Malta) plc has based this document on information obtained from sources it believes to be reliable but which have not been independently verified and therefore does not provide any guarantees, representations or warranties. MeDirect Bank (Malta) plc, company registration number C34125, is licensed by the Malta Financial Services Authority under the Banking Act (Cap. 371) and the Investment Services Act (Cap. 370).

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