Unemployment in Britain and the US could surpass the levels reached during the 1930s Great Depression within months as the coronavirus crisis crushes the global economy, a former Bank of England official has warned.
In a stark forecast as job losses mount around the world, David Blanchflower, professor of economics at Dartmouth College in the US and a member of the Bank’s interest rate-setting monetary policy committee during the 2008 financial crisis, said unemployment was rising at the fastest rate in living memory.
Writing in the Guardian, the economist said UK unemployment could rapidly rise to more than 6 million people, around 21% of the entire workforce, based on analysis of US job market figures that suggest unemployment across the Atlantic could reach 52.8 million, around 32% of the workforce.
“There has never been such a concentrated business collapse. The government has tried to respond but it has no idea of the scale of the problem it is going to have to deal with. We make some back-of-the-envelope calculations and they are scary,” he said.
Making the assessment alongside David Bell, a jobs market economist, the former Threadneedle Street policymaker said the collapse in activity amid Covid-19 and the accompanying rise in unemployment looked to be at least 10 times faster than in the recession triggered by the 2008 financial crisis.
The economists said that while government support in Britain for companies to furlough workers could help to cushion the blow, unemployment would soar. While joblessness would rapidly rise, they cautioned it was uncertain how long the impact would last and how quickly unemployment would come down. During the Great Depression, records show unemployment hit 24.9% in the US and 15.4% in the UK over several years.
The warning shot for the two economies comes as business activity in Britain and the eurozone plunged to the lowest levels since the start of closely watched surveys more than two decades ago and as unemployment in the US begins to rise.
According to the latest snapshots from the purchasing managers indices (PMI), which are based on surveys of business activity, the private sector economy in the UK and the eurozone collapsed in March at the fastest pace since records began in the late 1990s.
The US economy also shed 701,000 jobs, according to March data, far more than the 100,000 fall expected on average by economists. The unemployment rate rose to 4.4%, up from 3.5% in February.
The latest health check in Britain from IHS Markit and the Chartered Institute of Procurement and Supply (Cips), which is closely monitored by the Treasury and the Bank of England, revealed the onset of job losses last month as the government in effect shut down large swathes of the economy.
The PMI reading for manufacturing and service sector output, making up the vast majority of UK growth, crashed to 36.0 in March on a scale where anything above 50.0 separates growth from contraction. The index was below the initial “flash” estimate made in late March as more survey data came in later in the month amid the onset of lockdown measures. The collapse in the PMI, down sharply from 53.0 in February, was the worst reading since records began in 1996.
Duncan Brock, group director at Cips, said: “It’s increasingly difficult to find the words to describe the devastation as every region in the world fights to save human life as the first priority. The likelihood of a global recession is now a given, though its duration and severity has yet to reveal itself.”
British companies said emergency government support to furlough staff had helped prevent more widespread job losses in March. However, employment in the services sector – which includes restaurants, hotels and the City – dropped at the fastest pace for more than a decade.
Reflecting international travel restrictions and widespread business closures across Europe, companies said existing projects had been placed on hold and new inquires from abroad had virtually ceased.
Surveys of factory output and service sector activity in eurozone also revealed the biggest ever single monthly fall in March, setting the currency bloc on course for a deep recession.
The IHS Markit eurozone composite PMI, which combines manufacturing and service sector activity, plunged to 29.7, below the flash reading and significantly down on the 51.6 level recorded in February before Covid-19 struck Europe. The PMI was the worst since the eurozone survey began in 1998.
“In one line: horrid, hideous, harrowing … you get the picture,” said Claus Vistesen, chief eurozone economist at the consultancy Pantheon Macroeconomics. “We are struggling to come up with words to describe these numbers, which are now so far out of any reasonable range that they are difficult to interpret.”