Despite GDP Growth, Unemployment Peak Expected in Early 2010

Unemployment in the U.S. is at its highest in the last 26 years, exceeding 10 percent, and the National Association for Business Economics claims it will hit bottom in the first quarter of next year. Europe is holding steady, just below ten percent, with Spain already reaching 19.3 percent.

Written by: Vanja Figenwald
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In recent months, statistics have, at least in terms of the economy, become a friend again. Most of the world’s economies have emerged from recession and started recording small gains. Among the fortunate are Japan, America, Germany, and France, while Britain, a major player, is still waiting to officially cross the line. However, even though the acronym most commonly used in the past year – GDP – has started to feel relatively good again, the same cannot be said for employment, which continues to fall like Niagara Falls. The worst part is that even expert predictions do not suggest a quick recovery for this extremely important statistic, upon which the overall recovery depends. Because if a sufficient number of people are not employed, economic logic says they have no relevant income, and therefore do not spend. If they do not spend, industry has no one to produce for. And then you have more unemployed. The unemployed, in turn, create additional costs. A very ugly vicious circle.

At the beginning of November, the U.S. recorded a new unfortunate record in its curves and columns. Unemployment reached its highest level in the last 26 years, jumping to 10.2 percent, meaning that nine million Americans are currently receiving social assistance. Additionally, the economy has not lost this many jobs in a single year since World War II. Since President Barack Obama took office in January of this year, the American economy has lost 3.5 million jobs, totaling 7.3 million since the onset of the recession in the last month of 2007, when the unemployment rate was an unimaginable 4.9 percent today. However, it depends on how one looks at things: the current administration claims that the $787 billion stimulus package saved 640,000 jobs that would otherwise have been lost. Predictions vary, but none offer quick comfort. According to the National Association for Business Economics from last month, unemployment will hit bottom only in the first quarter of next year, but this, says its study, does not mean an explosion of employment, just a slow change in trend. In other words, high unemployment will mark the entire next year and remain at around 9.6 percent until the last quarter. 

Unpleasant Surprises
Others do not forecast sunny and warm conditions in the new year either. The Chicago Fed predicts a similar development in the war against unemployment with slightly different figures. Unemployment is expected to peak in the spring and stop at 10.5 percent, falling to 9.5 percent by the end of the year in the best-case scenario.
It is not much better in Europe, although the activity of the welfare state has significantly mitigated the negative effects of the drastic rise in unemployment. At the level of the European Union, according to Eurostat, unemployment has steadily risen from 7.6 percent in December last year to 9.3 percent in October this year. The absolute record holder for recession is one of the hardest-hit Union members, Latvia, whose unemployment reached a concerning 20.9 percent in October. While the stumble of the Baltic ‘kittens’ could be expected given the structure of the economy dependent on external financing and investments, an unpleasant surprise has been Spain, one of the more prosperous countries, which has the second-worst statistic in the Union, 19.3 percent unemployed, along with, even worse, a very poor macroeconomic outlook for next year. According to The Economist, this country will be one of the few in the Union expected to see a decline in GDP next year. All major economies have felt the recession’s cuts on the workforce, albeit unevenly.
German unemployment, for example, has risen, considering the context, by a slight 0.4 percent, from 7.1 at the end of last year to 7.5 at the end of this year. In the German case, it should be noted that the country has had relatively high unemployment for some time compared to usual indicators. France, on the other hand, has dangerously approached America, with 10.1 percent at the end of 2009 from 8.5 in December 2008, while Italy has managed to position itself among the more successful with an increase in unemployment of one percent, from seven to eight.

What is Panic, and What is Surplus?
Despite one of the worst situations in Europe, the United Kingdom has not recorded as alarming unemployment as, for example, the French. In line with some average of the Union, unemployment has risen by 1.9 percent, to 7.9 percent in December this year. On the other hand, forecasts for them are similar to those in America. The umbrella industrial association CBI warned this month that workers in the Kingdom can expect further job cuts and wage reductions, noting that the economy will not return to pre-recession growth for another two years. Interestingly, the CBI concluded that the country has emerged from recession, although there is still no official confirmation, and the peak of unemployment is expected in the third quarter of 2010, when approximately 2.8 million Britons are expected to be unemployed.

Considering that employment generally reacts more slowly to changes in other macroeconomic indicators, especially to GDP trends, such creeping statistics and lagging behind generally positive trends could be explained. The recession itself is the cause of a large number of layoffs, but many have likely seized the opportunity to offload labor they had considered surplus for some time. Additionally, one of the reasons for high unemployment and the stubbornness of the negative trend should be mentioned as panic due to the outbreak of the crisis, which later proved to be exaggerated. Gloomy predictions and the creation of a generally pessimistic atmosphere have caused exaggeration in layoffs, as evidenced by the fact that a number of companies in America are currently operating at the minimum required workforce. Former Fed Chairman Alan Greenspan recently noted that many companies were ‘very scared’ and are now barely functioning with a skeleton workforce. ‘The level of employment is barely sufficient for business.’ And the effects have varied. America, traditionally socially insensitive, has only extended the duration of social assistance, while European governments have acted with more active measures to subsidize the workweek and increase benefits for the unemployed. All in all, things do not look good for some time.