Employment growth, the other pillar of the European recovery

Faced with numerous external shocks, the resilience of domestic demand in the Eurozone is largely based on the improvement of labour market conditions. The risk is that, as gloom sets in or worse intensifies, companies will reduce hiring, banks will tighten credit standards, which will magnify the cyclical slowdown. To date, the pace of job creation has not really slowed, with one notable exception, temporary staffing. This mainly reflects the weakness of the industrial sector, a weakness for which we believe some of the causes are exceptional and transitory. A decline in temporary staffing, concentrated in industry

Peter Praet, member of the ECB’s Executive Board and responsible for his macro analysis, has in recent days outlined the uncomfortable position in which the central bank finds itself. It must distinguish between negative external risks and more encouraging domestic factors, particularly with regard to credit and employment. We have already examined the financing conditions , let us take a closer look here at the labour market.

It is noteworthy, and quite surprising, that in 2018 employment conditions strengthened in the Eurozone, at the very time when the business climate was weakening to an extent that was not at all expected. The number of unemployed has continued to decline and, moreover, this reflects a movement in all countries The participation rate continued its modest but steady increase observed since the beginning of the recovery in 2013. Wage gains have accelerated slightly. According to our calculations, the average number of jobs created per month in 2018 was 182,000, roughly comparable to the trend over 2015-2017. In addition, after a fairly sharp decline during the summer, the rate of job creation rebounded in Q4 2018. At first glance, this does not correspond to the image of an economy heading into recession.

All told, employment in the Eurozone is currently rising at a clip of around 1.2% on an annualised basis. Were productivity gains to be maintained at their level of the last five years, i.e. 0.7% per annum, this would place real GDP growth in the region of 1.9%. Real GDP growth averaged 1.8% in 2018, but just 1.2% year-over-year in Q4. In reality, productivity gains have been almost at zero since last spring, which  means that employment has been very resilient. Will this firmness of the labour market in the Eurozone continue, or is it just a sign of the lagging nature of employment in the cycle?

· While employment exhibits a fairly high degree of inertia, it has not been established that it is a lagging variable in the business cycle. Its variations are fairly similar to those of economic activity. During the great financial crisis, growth in employment and GDP dropped into negative territory in Q2 2008. During the double dip, employment contracted in Q3 2011, one quarter ahead of GDP. It is only in the phases of an exit from recession that employment seems to genuinely lag. Several factors have been referenced as an explanation of the stronger relationship between employment and GDP, including the development of the services sector (which bears a closer correlation with domestic demand) or certain labour market reforms4 . In any case, in light of the historic data, there is no reason to conclude that the slowdown in employment (-0.3 points year-on-year in Q4 2018) must inevitably be aligned with the decrease in real GDP (-1.5 points over the same period).

 · Another indication, which is more worrying, lies in the temporary employment trends. These jobs tend to be adjusted rapidly according to the up- and downtrends in the business cycle. Here again, for lack of aggregate data, we have to make our own calculations based on the available national data. According to our estimates, temporary employment dipped throughout 2018 to finish on a slight year-on-year contraction in Q4. This is reminiscent of the downturns seen in 2008 and 2011 ahead of recessions .

 · The weakness of temporary staffing is mainly linked to industry – a sector in technical recession in H2 2018 due in part to a number of one-offs. The most notable was the disruption to automotive output at the introduction of the new emissions standards. Activity conditions are in the process of returning to normal. In Germany where this shock was the greatest, the survey with temporary employment agencies showed an unprecedented gap between their assessment of past employment (very negative) and their expectations (strong recovery), which is the sign of a temporary phenomenon. In France, industry only represents 11% of total employment but 38% of temporary employment. In addition, the services making the greatest use of temporary staff are also those with the closest links to industry (transport, storage). According to French labour statistics body DARES, temporary employment passed its low point this summer, but the social climate in France at the year-end did nothing to help the recovery.

 · The other highly cyclical sector is construction. In the Eurozone as a whole, there are no alarming signals regarding employment. According to the European Commission’s surveys, confidence is close to an all-time high and the outlook for employment remains positive. This masks the diversity of the situations in each country – strength in Germany, dip in France, a slow recovery from a low level on the periphery. The number of building permits is relatively stable on the Eurozone’s scale, which, given the weakness in France, reflects an increase in other countries. The environment does not suggest that there will be a sharp drop in employment

All in all, the labour market’s data in the Eurozone bear out the idea of a slowdown mainly affecting industry due to temporary factors weighing on supply, with uncertainty about demand (political situation, foreign demand) acting as a secondary factor. This does not look like the situations normally seen on the eve of a recession

Bruno Cavalier – Chief Economist – Oddo BHF AM
Fabien Bossy – Economist – Oddo BHF AM