Unemployment rates across the developed world have continued to improve (see chart 3). There seems to have been some fall in the rate of improvement in the US, the UK and Japan but this is only to be expected given that unemployment rates have been falling since 2009 (in Europe, unemployment only started to improve in 2013, and from much higher levels, so there the pace of improvement is if anything rising). The average of the four series stood at 5.9% as of March which should mean there is still plenty of scope for it to fall further. Indeed, during the last cycle from 2003 to 2008, the unemployment rate continued to fall for a further three years or so after it first hit 5.9%.
"This masks the fact that the workforce has shrunk as a result of people having left the workforce"
Furthermore, there are reasons to think that it can fall further and for longer than it did during the last cycle. In the case of the US, for example, although the unemployment rate has fallen a long way already, this masks the fact that the workforce has shrunk as a result of people having left the workforce. If as a result of the continued improvement many of them decide to re-enter it, this could well prolong the cycle (in fact this has started to happen, as evidenced by the rising participation rate).
Second, there is evidence to suggest that the unemployment rate at which inflation starts to rise (also known as the NAIRU – the non-accelerating inflation rate of unemployment) has fallen. The Fed’s estimate of NAIRU fell from 5.6% in 2013 to 4.9% towards the end of last year. There is no reason to think it hasn’t fallen further since, meaning that employment may continue to rise without causing the Fed a headache.
As for emerging economies, data is sparse (see chart 4). Brazil is undergoing a nasty recession but the improvement in the inflation picture as noted in the previous section is encouraging.
Published in Investment Letter, May 2016
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.
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