While Europe‘s economy has been finding the going tough since 2022, the labour market continues to be ‘something of a conundrum’, a new report from ING has suggested.
The unemployment rate in Europe is at a historic low of 6.4%, despite stagnation in the economy, but signs are that this anomaly is set to come to an end, with wage growth set to ease, unemployment to rise, and more bankruptcies on the horizon.
‘Back to normality’
According to Bert Colijn, chief economist, Netherlands, and Carsten Brzeski, global head of macro at ING, the market is “now getting back to some sort of normality. The days of stagnation without rising unemployment are set to come to an end.
“Look at vacancy rates. They’ve been coming down from historical highs, but they’re still above pre-pandemic levels. Coming down, too, is the number of businesses reporting that labour shortages are limiting their growth. Those two things normally coincide with recession. But, despite the weak economic data we’re getting month after month, that’s not where the eurozone is right now.
“So, we’re arguing that we’re starting to transition into something far more normal, and it will have a more noticeable effect next year, with unemployment creeping up and wage growth trending markedly lower.”
As the analysts note, strong profit growth during high inflation periods has allowed businesses to absorb the costs associated with maintaining larger workforces, even when productivity has faltered. However, as inflation starts to normalise, profit growth also diminishes, dropping from over 10% in early 2023 to less than 1%.
“Even though profit growth has dropped to levels close to zero, wage demands continue to come in high,” they note. “When looking at different countries, Germany and the Netherlands still stand out with high wage demands, while others seem to moderate more quickly.
“Still, with profit growth already falling quickly and a series of negative headlines from industrial companies, particularly in Germany, the question is what is going to give.”
Changes to the labour market
Looking ahead, it is anticipated that the eurozone jobs market is set to undergo significant changes, with the balance between maintaining margins and addressing high wage demands likely to prompt a multifaceted response.
“Wage growth should clearly slow down over the course of next year,” the analysts note. “The alternative is an increase in redundancies and bankruptcies, although we don’t expect this to be dramatic.
“At the same time, governments are starting to tighten their belts. While this is happening at different speeds and with differing effects on employment, we do think that the pace of employment growth in the (semi-) public sector will be under pressure because of it.
“All of this means that the current labour market situation is not a new normal. We expect a period of normalisation to start with the end of high inflation and profit growth as the trigger. In fact, we already see some of this happening right now. But, we do expect the impact on unemployment and bankruptcies to become more visible in 2025, with a modestly increasing unemployment rate as a result.” Read more here.
