Recorded 6.6m jobless claims in US in a week. The Central Bank of Ireland indicated a potential 25% contraction in the economy in 2020
(03/04/2020)
As we’ve mentioned previously, one of the biggest differences between the US and Europe in terms of how respective economies are likely to recover is the US libertarian attitude versus Europe’s socialist leaning.
The US is the most important economy globally, not least because of how reactive the markets are. Yesterday’s news of record smashing newly jobless of 6.65m shows where the global economy is likely to go as the US is not buffered by a social security net like EU countries are. After only 2 weeks of steep rising unemployment, it is likely to increase still. The total number of recorded unemployed in the US is over 10m. Between February and March 2020, the US unemployment rate jumped from 3.5% to 4.4% – a number that is yet to reflect more recent changes in employment.
In Europe we are still waiting for official data but already Spain, Italy and France are indicating high unemployment numbers. Another limit to economic recovery caused by socialism is that a higher proportion of workers are employed by the state, and with benefits more attractive, we tend to have slightly higher unemployment numbers typically and it is a tougher task for the EU to tackle. In the US companies can go bankrupt and re-emerge relatively quickly which means they are better able to recover from a downturn in the economy.
Closer to home the Central Bank of Ireland released its second quarterly report which indicated a potential 25% contraction in the economy in 2020, and a peak unemployment rate of 25% in Q2. This unemployment figure is predicted to level back to 10%+ by the end of the year. Ireland sits somewhere between the EU and US in terms of their models for supporting the economy, so may recover quicker than more social counterparts.
One common approach to the current crisis being employed by both the EU and US is the funding being made available to support SMEs. This appears to be a positive tactic but if funding is being made available through the markets, the seizing up of lending may present an issue to fund circulation. Typically, markets are a good place to distribute money, but this seizing of lending may stymie supports put into markets.
Companies have been pulling back on dividends, which may negatively impact markets further as dividends form an attractive benefit of investing equity stocks. In European bond markets the ECB differentials continue in prices between countries like Spain and Italy, who are expected to be hit harder by the crisis, and Germany who are typically more resilient.
