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Khatija Haque - Head of Research & Chief Economist
Published Date: 13 September 2020
Employment in the US rose by 1.37mn new jobs last month, helping the unemployment rate down to 8.4% from a pandemic-peak of 14.7% in April. The latter was particularly encouraging considering that 1mn more people started looking for work in August after generous federal unemployment benefits expired at the end of July.
While these most recent figures show that the US labour market is continuing to recover even as virus cases increased over the summer and congress failed to agree on a new stimulus package, it is not all good news (as it so rarely is when economists are telling the story). Firstly, the rise in jobs was the smallest since June, and if we strip out the 238,000 people hired temporarily for the census, then the underlying job growth was much slower than in July. More than half of the people who lost their jobs in March and April are still out of work. Secondly, while many of those who were laid off temporarily have now been re-employed, the number of unemployed considered “permanent job losers” has increased to 3.4mn people, almost 170% higher than it was in February. The longer people remain unemployed, the harder it can be for them to find work, and the less they are likely to earn once they do find new jobs.
Unlike in the US, unemployment in the Eurozone has risen only gradually in the second quarter of the year, as most governments put in place furlough or wage compensation schemes. Germany has recently extended its wage subsidy program until the end of 2021 to prevent companies from laying off workers in the interim. However, recent data suggests that the pace of economic recovery in the Eurozone is slowing. The Purchasing Managers’ Index (PMI) survey showed a slowdown in business activity last month, with the services sector particularly affected by the increase in coronavirus cases and reinstatement of some localized restrictions, as well as the impact on tourism. Jobs in the services sector continued to be lost in August, for the sixth month in a row.
The UK’s furlough scheme is set to expire at the end of October, and unless it is extended, unemployment could rise to 10% in the fourth quarter of this year from 3.9% currently. Indeed the August PMI survey showed that although business activity in the UK rose sharply in August, employment declined for the first time in three months.
Employment trends in our region are similar to what we have seen in the rest of the world. The PMI survey for the UAE showed that employment in the non-oil private sector declined sharply in August as businesses sought to cut costs in the face of sluggish demand conditions. According to IHS Markit, the company that produces the PMIs, 20% of the panel of firms surveyed last month said that they had reduced their employee headcount, while none reported an increase.
Private sector employment accounts for more than 80% of total employment in the UAE, according to a central bank report, so a decline in private sector jobs will have a negative impact on private consumption. Last year, private consumption accounted for almost 40% of the UAE’s GDP, and it is therefore a significant driver of economic growth (or contraction). The impact of job losses on household spending will likely be compounded by a decline in salaries for many of those still employed as well as those who have been placed on unpaid leave or furloughed.
So what can be done to soften the blow for households? Central banks have done as much as they realistically can by cutting interest rates to zero or below, and ensuring that financial markets have sufficient liquidity to function normally. Some developed markets’ central banks have gone further by opening a window for corporates to access financing directly, or by purchasing corporate bonds.
Fiscal policy also helped tremendously during the second quarter of this year, with direct payments to households (stimulus cheques and enhanced unemployment benefits in the US and furlough schemes in Europe) allowing consumers to meet their loan obligations and boost retail spending once restrictions were eased. But governments can and arguably should do more. One option is extending unemployment benefits or wage payment programs; another is boosting public sector investment in infrastructure and technology. The latter course of action would have the dual benefit of creating jobs now, when the private sector isn’t, while also boosting future growth potential.
This article was published in Arabian Business on 10 September 2020