(October 14): After years of unexpected resilience, the eurozone's labor market is finally cracking, prompting the European Central Bank (ECB) to cut interest rates more quickly. is being applied.
Policymakers this week saw signs of change that could help persuade them to support further cuts in borrowing costs, even as unemployment remains at record lows following an inflation shock and economic downturn. There is.
Despite the Fed's lack of a dual mandate to target both price stability and full employment, shocks to the European job market could have a significant impact on the ECB's inflation outlook.
Major companies such as BASF SE and ThyssenKrupp AG are already cutting jobs, and some officials worry that a sudden economic downturn could further disrupt a region on the brink of recession.
“Some hawks are saying that the easing cycle is not automatic, but I think they will cut rates in October and continue to cut rates,” said Soren Radhe, an economist at Point72. “They are on that trajectory and they need to be. The biggest concern is the labor market.”
It was in July that President Christine Lagarde touted the strength of Europe's job market as the reason why the ECB “takes time to gather new information” when deciding on monetary policy. It looks like that time is over.
So far, the data points to only a mild cooling, not a sharp recession. But job growth slowed to just 0.2% in the second quarter, and the vacancy rate fell to 2.6% from a peak of over 3% in the same period. Research, including S&P Global's monthly poll of purchasing managers, paints an even worse picture.
“The decline in vacancies and the slowing pace of hiring are signals to pay attention to, and this was clearly an important motivator for the Fed to choose 50 basis points,” said Michala Marcussen, group chief economist at Société Générale. and mentioned the United States. Interest rate cut in September.
Mario Centeno, president of Portugal's central bank and a qualified labor economist, said early signs of weakness in the euro zone were “some flashing warning signs more urgent than others, but none of them… “This shows the possibility of a reversal in the labor market.”
Hawkish officials acknowledge the problem. Board member Isabel Schnabel believes a decline in talent motivation increases the chances of a sustained decline in inflation to the 2% target. Latvia's Martins Kazaks warned of the risk of a tipping point where some companies could start unwinding their early job hoardings in the wake of economic disappointment.
“In that case, there could be some kind of snowball effect,” he warned.
Manufacturing is a key issue, weighed down by weak Chinese demand and domestic competitive disadvantage. It's been that way for a while, but the general theory has been that companies keep employees on board in case it's difficult to rehire them if the need arises later.
Some companies appear to be losing confidence in the economic recovery. A case in point is Volkswagen AG, which is considering closing its German factory for the first time. Plans for retrenchment in this area continue to be brought forward, including at Continental AG. On the other hand, passive consumers mean that service margins have not recovered.
As a result, Goldman Sachs economists predict that the eurozone unemployment rate will rise to 6.7% in the coming quarters. They argue that a downturn in the economy could lead to even worse outcomes, and will support their calls for interest rate cuts at each meeting starting this week until deposit rates reach 2% from the current 3.5%.
Supporting the argument for faster easing is the fact that a weaker job market typically leads to lower wage growth, which in turn suppresses inflation.
“If the labor market continues to cool, workers may accept more modest pay increases in exchange for job security in future wage renegotiations,” Barclays economists recently wrote.
The ECB's assumption that it will sustainably reach its 2% inflation target in the second half of 2025 is based on a slowdown in wage growth. However, it also does not want the labor market or wage growth to be excessively suppressed.
Chief economist Philip Lane said last week that a strong job market would “increase the chances of hitting our inflation target rather than chronically undershooting it,” adding: “The rate of wage growth over the next few years will be affected by the coronavirus pandemic. “We will be more in line with our goals than before the pandemic.”
“The euro area labor market still looks very resilient, but there are clear signs of softening,” said Carsten Junius, an economist at Banque J. Safra Sarasin. “The ECB should also react to this and avoid a full-blown recession due to a significant rise in unemployment. This also suggests bringing forward rate cuts.”
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