Global Daily: Eurozone retrenchment pressures

Euro Macro: Labour costs shoots higher despite government subsidies – 

Eurostat has published data on hourly labour costs that were incurred by employers in the eurozone in Q2.

The data shows that the yoy rise in total hourly labour costs in the business sector has accelerated to 4.1% yoy in Q2, up from 3.3% in Q1. In the final quarter of 2019 before the outbreak of Covid-19 the rise was merely 2.2%.

The rise in labour costs may well by inflated by measurement problems (especially in recording working hours) as given the economic shock it is unlikely that pay growth was as strong as suggested by these data.

The break-down in main sectors in the business economy shows that the rise wat strongest in the services sector (4.4% yoy in Q2), followed by industry (3.8%) and construction (2.8%).

As this rise in labour costs has occurred during a period of weak domestic demand, companies will not be able to pass it on to consumers by raising prices.

Indeed, we expect the rise in labour costs to add pressure to corporates and to the retrenchment that is already underway.

Given weak demand and rising unemployment, we expect wage growth to slow sharply going forward. This should be an extra headwind to both consumer demand and inflation.