Figure 2: Unemployment Change during COVID-19 pandemic (% of labour force) [select countries]

Source: Refinitiv Datastream Date: 20/05/2020

*April data not yet available
^ all data seasonally adjusted

United States

The US government unveiled a massive $2 trillion stimulus package in March intended to soften the economic blow caused by the virus-induced lockdowns. These unprecedented measures include sizable allowances for smaller businesses and a hefty increase in unemployment insurance. Unlike in Europe these programmes have, however, been very much geared towards providing support for those who have been laid off, rather than keeping them in employment.

This lack of support for keeping employees on payrolls, and the country’s much more fluid “hire and fire” system, has been reflected in the most recent economic data. A total of approximately 36 million Americans have filed for unemployment benefits since the onset of the crisis in mid-March at the time of writing (Figure 3), equating to around 22.5% of the country’s total labour force. For context, the peak weekly job losses during the height of the 2008/09 global financial crisis was 665k, less than one-tenth of the peak during the current crisis.

Figure 3: US Initial Jobless Claims (2008 – 2020)

Source: Refinitiv Datastream Date: 20/05/2020

The April nonfarm payrolls report was similarly disastrous. A record 20.5 million jobs were lost in the US last month (Figure 4), by far the most on record. The official rate of unemployment also jumped to a series high 14.7%, a more than 10 percentage point increase on a month prior. This does, however, only cover the period through the first half of the month – the actual jobless rate is much higher in reality and likely in excess of 20%, which would be its highest level since the 1930s.

Figure 4: US Nonfarm Payrolls (2008 – 2020)

Source: Refinitiv Datastream Date: 20/05/2020

Euro Area

In contrast to what we’re witnessing across the Atlantic, the labour market in Europe has held up reasonably well so far. An analysis of the latest data for the largest economies in the bloc shows a considerably less aggressive increase in those registering as unemployed than in the US. For those countries that have data available for both March and April, these cumulative jobless increases have been comparatively contained: Germany (0.8% of the LF), Spain (3.0%), Netherlands (1.9%) and Austria (4.1%), versus approximately 21% in the US. The number of those registering as unemployed in Italy actually fell in March, although this has a lot to do with a decline in those already unemployed actively seeking work.

Figure 5: Registered Unemployment Change [Germany & Spain] [MoM] (2002 – 2020)

Source: Refinitiv Datastream Date: 20/05/2020

While the indicators in the above table are not directly comparable with each other given the different methodologies used to measure unemployment, they do provide a good gauge as to just how much better the Euro Area labour market is currently faring. The main difference in approach between Europe and that of the US is the heavy emphasis that authorities in the bloc have placed on job retention. Schemes such as those in Germany (Kurzarbeit), France (Activité Partielle) and Italy (Cassa Integrazione Guadagni) have subsidised incomes to various degrees since the onset of the lockdowns. This has kept millions of Europeans that would otherwise have been laid off in formal employment, in the hope that they will return to work once the lockdowns are lifted.

United Kingdom

The UK government has also emphasized job retention in its COVID-19 stimulus measures. Chancellor Rishi Sunak unveiled the UK’s Job Retention Scheme during the early stages of the pandemic in March. This programme involves the UK government covering a maximum of 80% of workers salary up to £2,500 a month. The scheme will run until at least the end of October, though the rate of support will drop from 1st August. As of mid-May, the government had reported that it was subsidising salaries of around 7.5 million employees across 1 million businesses – approximately 22% of the UK labour force.

The impact of the government’s furlough scheme has been reflected in the latest claimant count data, which represents the monthly change in the number of people claiming unemployment benefits. New claims spiked to a worse-than-expected 856,500 in April, the largest monthly increase on record. The labour market has, however, been spared from a complete meltdown. As it stands, claims in March and April combined only account for around 2.6% of the entire UK labour force. While this would be an extraordinarily high number under normal circumstances, it is nowhere near as catastrophic as it would have otherwise been had the scheme not been in place.

Figure 6: UK Claimant Count Change [MoM] (2000 – 2020)

Source: Refinitiv Datastream Date: 20/05/2020

What does this mean for the FX market?

As mentioned in our Q2 G10 forecast revision, we think that the relative performance of labour markets will be one of the main determinant factors as to how quickly respective economies get back to normal once the worst of the crisis is over. It is our view that those economies that experience a sharper increase in unemployment will suffer from a slower recovery than those that have managed to protect jobs during the lockdowns. The process of rehiring is likely to be a slow and uneven one, whereas the return to work for those furloughed staff should prove more seamless.

As noted above, the weaker job retention schemes in the US has already led to a significantly sharper increase in US unemployment than much of the rest of the developed world, particularly the UK and Euro Area. This is one of the primary reasons why we remain of the opinion that a weaker US dollar against both the euro and the pound is more likely than not in the medium-term