Thursday, 8 December 2016

People in the Euro Area Are Getting Back to Work, Fast

In World Economy News 08/12/2016

As UBS Wealth Management economists Ricardo Garcia and Christoph Buxtorf point out in a note, joblessness in the 19-nation currency bloc has declined more rapidly than many, including the European Central Bank, anticipated. In fact, at 9.8 percent, unemployment in October hit the lowest level in more than seven years, and came in below the 9.9 percent the ECB foresaw on average for 2017 in its September projections.
The speed of the decline is bound to have an impact on the fresh projections that will be published on Thursday. Coupled with a steadily rising employment rate, the data suggest the output gap in at least some of the region’s countries could be closing fast, which in turn would mean that domestic inflation could rise faster than expected.
In the Governing Council, “the hawks may argue that following the oil-related boost to headline inflation in 2016 and 2017, the smooth and rapid closing of the output gap may support headline inflation through core inflation in 2018 and 2019,” write Garcia and Buxtorf.
In fact, the ECB has already tried to explain this unexpected decline. In an Economic Bulletin article published in September, it argued that there were two main reasons. On the one hand, countries like Germany and Spain (and, to a lesser degree, Italy) have reformed their labor market and made it more capable of responding to the economy’s fluctuations; on the other hand, it was due to longer-term factors such as the shift to services as the driver of growth.
“The recent strong employment performance relative to GDP developments is partly due to structural changes under way across the euro area, including ongoing sectoral shifts and compositional changes to the workforce, which have resulted in a labor market that is more flexible and more responsive to cyclical dynamics,” it concluded.
There’s some debate going on now about whether the labor-market reforms help or hinder the quest for faster inflation. For now, the ECB will probably be pleased that unemployment is back in single digits.

Source: Bloomberg