Saving the economy will take a lot more work than the furlough scheme

It is the calm before the storm. A tidal wave of unemployment is about to sweep across the world, leaving behind social and economic misery.

Up to now the challenge has been how to protect jobs in the short term. Some countries, including the UK, have done that better than others. The unemployment figures for April, steady at 3.9 per cent, have been held down by the government-financed furlough scheme, which has close to 9 million people on it. Obviously, that cannot carry on, and employers are now working out how many people they will need through the winter and into next year. The string of job cuts announced by companies that are particularly hard hit – the airlines, the high street retailers, the energy companies and so on – are harbingers of troubling times to come.

Remember, unemployment figures give a rear-view mirror picture of the near past. As Vince Cable points out, the forward-looking data on job hiring look particularly worrying. Unless the economy starts growing more swiftly than it is at the moment, any initial bounce will be capped by the rise in unemployment through the autumn.

So what will happen next?

The good news is that if you look at the UK level of unemployment before the crisis, that 3.9 per cent number was by world standards quite low. A few major economies, notably the US and Germany (both 3.5 per cent) and Japan (2.6 per cent) were lower still. But France and Italy were close to 8 per cent, and the Eurozone was more than 7 per cent. Even countries that have been perceived as successes such as Finland and Sweden had unemployment above 7 per cent in March.

Different countries have, however, reacted very differently to the challenge. The US is an outlier because it allowed unemployment to shoot up, preferring instead to support families with cash directly into their bank accounts whether they were employed or not. So unemployment peaked at 14.7 per cent in April, before coming back down to 13.3 per cent in May. Canada experienced similar levels, in May a little higher than the US.

At the other extreme (and more like the UK) is Germany, where unemployment stayed at 3.5 per cent in both April and May, and France, where it actually fell in May to 7.8 per cent from 8.1 per cent in April.

So the crude unemployment figures tell us about the short-term policies that countries are adopting on unemployment. They do not tell us much about the general resilience of their economies to what is already a huge economic shock. It may turn out that it is better to take the hit straight away, as have the US and Canada, rather than delay the impact as has much of Europe. It would be great to know, but we can’t because there is no precedent. We have not had a global health emergency on this scale for a century, and never had global shutdown.

There are however a few things that can be said with some confidence. One is that inherently fast-growing economies – ie ones that were growing swiftly before the crisis – are likely to remain swift-growing. A second is that countries that were resilient after the financial shock of 2008/9 are likely to be resilient again. A third is that big government stimulus programmes do have some impact, so those countries that have the capacity to pile in the dollars, euros or pounds, are likely to do better than those that can’t.

The conclusion from this would be that the US will manage a reasonable recovery – by the way, Morgan Stanley is predicting a V-shaped bounce back – and northern Europe, Germany in particular, will do better than southern Europe. The US has the resilience and the Federal Reserve’s ability to print the most important global currency, and Germany has the cash to spend, thanks to its years of frugality which paid down debt and gave it a fiscal surplus.

The UK is in a more uncertain position. It did manage a decent recovery last time, particularly in generating employment, though less so in increasing real incomes. And it has its own currency and an independent central bank that can flood the country with money. Expect another stimulus from the Bank of England this week. But it is struggling to crank up demand, particularly in the hospitality and entertainment industries, for reasons that we all know about. It is also unusually affected by the air travel restrictions. More people fly in and out of London’s six airports than any place on earth. And while in the past service-based economies have tended to be more resilient to shocks than manufacturing-based ones, it is not clear that this will now be the case.

What is abundantly clear is that the UK needs not just short-term job protection but measures to boost long-term growth. Chancellor Rishi Sunak is readying a package to do so. It will not come a moment too soon – and we have to hope it will work.