The Eurozone’s Labour Market Bonanza

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The Eurozone’s Labour Market Bonanza

The Eurozone is comprised of 19-member states all of whom adopt the Euro as their sole form of legal tender.

Several economies in the Eurozone are predominantly export-led, with growth influenced by the amount of goods sold abroad. For some of the larger and more influential Eurozone members, namely Germany, exports such as automobiles and other manufactured goods are sizeable. For example, in 2016 alone over 7.5 million German vehicles were exported to China. Moreover, the region as a whole has a significant trade surplus (illustrated below) meaning they export more than they import, at a time when many major economies have a deficit, an obvious example being the US.

Eurozone Balance of Trade in Euro (Millions)

Source: Bloomberg, June 2019

It is no great surprise that exports have come under pressure following a time of nervousness around US-China trade wars. However, you may recall earlier this month we issued a report showing economic sentiment stabilising and picking up across Europe. We are now seeing confirmation of the improvement in sentiment through labour market data.

Wage growth in the Eurozone rose by 2.5% in the first quarter of this year up from 2.3% at the end of last year. This is the fastest pace in a decade, according to Eurostat data, as indicated below. Moreover, when seen against inflation in the chart, real spending after inflation has been given a boost i.e. wages up, inflation down.

Eurozone Wage Growth & Inflation Rate

Source: Bloomberg, June 2019

Almost all 19 members reported an expansion in wage growth, showing great breadth across the bloc. The improvement is getting support from a pick-up in job prospects. The Eurozone unemployment rate continued its downward trajectory to 7.6%. Unemployment has been in a consistent downward trend since its peak level of 12.1% in 2013, illustrated below. With labour markets continuing to tighten, this could translate to even greater levels of wage growth.

Eurozone Unemployment Rate

Source: Bloomberg, June 2019

Both the level of unemployment and wage growth are fundamental metrics confirming labour market strength. This is helping the economy at a time when the export sector is struggling. Mario Draghi, president of the European Central Bank, encapsulated the improvement by stating “further employment gains and increasing wages continue to showcase the resilience of the Eurozone economy”.

What we know is that global trade remains weak and still weighs on exports that European companies depend on for profit. A key factor to observe will be the outcome of Mr Trump’s trade talks with China and indeed whether Trump decides to target the EU with tariffs. Mario Draghi has noted this threat and has recently signalled that the European Central bank stands ready with yet more stimulus if needed.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

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