Recession Watch: European Unemployment Trends

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Recession Watch: European Unemployment Trends

When we last checked in on Eurozone unemployment back in January things were going well, if unevenly. Here was the data we showed you:

  • Overall EU unemployment was 6.7% for November (reports here lag much more than in the US).
  • This was the first report that showed the EU at lower levels of unemployment than the prior cycle (February – April 2008) which troughed at 6.8%.
  • At the same time, several major economies were lagging this overall positive reading: France (8.9%), Italy (10.5%), Spain (14.7%).
  • Eurozone labor markets were best in Germany (3.3% unemployment), the Low Countries (3.3% – 5.5%) and Austria/Poland/Hungary (4.7%/3.8%/3.8%).
  • We noted this dispersion between large/small Eurozone countries was much greater than that exhibited between various major US states. This is an important difference when considering European politics and monetary policy.

So how does the data look now? Three points:

#1: The Eurozone as a whole has shown further improvement and continues to move deeper into new-low territory for unemployment. January 2019’s reading was 6.5%. Again, the old 2008 low was 6.8%.

#2: Among the 4 major economies, however, only one is showing any real improvement based on January data:

  • Spain’s unemployment rate has dropped to 14.1%, a 40 bp improvement from a revised November rate of 14.5%.
  • Italy’s January rate was 10.5%, unchanged from November’s rate.
  • France’s unemployment rate stands at 8.8%, down only 10 bp from November’s 8.9%.
  • Germany, which is arguably at full employment, currently shows a 3.2% unemployment versus 3.3% in November.

#3: Since Brexit is much in the news, we’ll drop the United Kingdom into this analysis:

  • You won’t find Brexit uncertainty in the unemployment data. Back in June 2016, the date of the original vote, joblessness stood at 5.0%. In the most recent period (November 2019 – January 2019) unemployment was 3.9%.
  • At that current 3.9% rate, UK unemployment is lower than any point since January – March 1975.
  • Prior cycle unemployment rate low points were in mid 2005, with a 4.7% reading, almost 1 full percentage point above where they sit today.

The upshot to all this:

First, is this as good as it gets for western developed economies? The US, EU and UK all sit at record levels of employment going back at least one cycle (EU) or multiple cycles (US and UK). All this is great for workers but puts capital markets on edge. Peak employment also means peak cycle, after all.

Second, in Europe, the fault lines still sit just below the surface. Major European economies like France, Italy and Spain are still far from record low unemployment:

  • Spain is 6 percentage points away (low of 8.0% in June 2007).
  • Italy is almost 5 points away (low of 5.8% in April 2007).
  • France is closer, as its low was 7.2% in February 2008.

Lastly, remember that unemployment is where politics meet monetary policy.The 2-speed labor market recovery in Europe is an underappreciated challenge for the European Central Bank. Granted, it cannot control labor market structure in laggard countries like Spain, Italy and France. But the combined 174 million people live in those three regions, more than double the German population (83 million).

Our bottom line remains unchanged from our earlier work: regional variations in European unemployment are still abnormally wide and that’s a challenge for both Eurozone political and economic cohesion. If the current global economic growth cycle can continue for the next 2-3 years, some of this will resolve itself. That’s a tall ask, however, unless global trade picks up soon.

Investment takeaway: underweight European equities.