Beyond the Headlines | 28 Jun 2024

Navigating the Economic Transition | Beyond the Headlines

Oliver Rakau

Oliver Rakau

Deputy Head Europe, Macro

Our latest video for asset managers

How much of the picture for 2025 is dependent on the US labour market?

In this week’s video, join Oliver Rakau, Associate Director, as he discusses whether there will be a divergence between centrals banks going into 2025.

Click here to check out previous Beyond the Headlines episodes.

You know that that picture for 2025 is very dependent on the labour market for the US, as you say, only maybe, you know, coming to you because for the European market, actually, we’ve seen quite a softening in the labour market so far. So, you know, is that a potential source of divergence, I guess, between the central banks going into next year?

Yeah. I think that’s one part of the divergence we are seeing. And one of the reasons why we think the ECB will and also should, be cutting, quite a bit more than markets, are pricing. So if we look at it, of course, at the headline level, unemployment, is basically at a historic low.

We have employment growing at a rather solid pace. So that’s how to say that there has been much labour market damage. we have talked, a lot in the past about labour hoarding, where firms basically, kept more labour than they typically would. And overall kind of this fed into wage pressures.

But if you look at the underlying numbers, I am not so sure that’s really the way, right way of assessing the European labour market, because if you look at real earnings, they’re actually still below, pre-pandemic levels, which is a big contrast to, the US, where it’s, clearly, above, pre-pandemic levels. So the outcome was really, for us, more, that workers have struggled to regain their bargaining power, given that, yes, labour markets, have been solid, really quite resilient despite all the headwinds, from monetary policy, from fiscal policy, from the big energy shock.

But in the end, what really counts, I think, is real wages. And those have been rather poor, because, workers haven’t been as strongly, they haven’t seen their bargaining position as strong as, some suspect, given the low unemployment rate. So we think some of the fall in the unemployment rate is really more structural rather than, cyclical.

Now more over on top of that, what we have is really a slowing in terms of hiring intentions. Really the feed through of tight monetary and fiscal policy, there is likely to be something like a stagnation in employment growth, broadly speaking, of the next couple of quarters and this is despite, our, assumption that the, labour force will be roughly stagnant or maybe even grow a little bit.

So there might be a bit of a rise in unemployment, but certainly we don’t expect big falls, any more looking forward. And maybe the biggest, factor, really, when we talk about the outlook for inflation, especially and the difference to the US is, a lot of the labour market wage agreements are really, in a way indexed to inflation, and inflation in Europe is certainly below 3% heading towards 2%. And in our forecast, even, below 2%, in parts of next year. And this really means that nominal wage growth is going to go lower. And that I think is one of the underlying currents that will drive the ECB to respond eventually. But it seems they really want to see those signs, rather than, wait for it.

Q2 Macro Outlook Roundtable

AM Roundtable

Download the full roundtable where our global leadership group debates more key themes for Q2.

Q2 Virtual Asset Management Roundtable

Actionable, timely intelligence to sharpen your investment decisions

Weak economic growth over the past decade didn’t slow a stellar market – especially equity returns. But current economic realities – from US monetary tightening to China’s broken growth model – are likely to complicate results in the medium-term future.

To help investment professionals make decisions that maximise opportunities in today’s market, Oxford Economics offers in-depth coverage, and a robust macro and asset allocation framework. Our products and services help decision-makers cut through the noise – offering the intelligence needed to develop in-depth economic models, understand the industry landscape, evaluate investment possibilities, and make profitable decisions. ​ 

Click here to subscribe to our asset management newsletter and get reports delivered directly to your mailbox

Could the election spark renewed interest in UK-focused stocks?

The UK election has concluded with Labour securing a landslide victory. This result is likely to set the stage for a period of political stability and, combined with signs of a consumer-driven economic recovery, makes domestic-focused UK stocks increasingly attractive.
Read more: Could the election spark renewed interest in UK-focused stocks?

Modeling the economic impact of a Democratic sweep | Beyond the Headlines

The outcome of the presidential and congressional elections this November will be pivotal for the outlook in 2025 and beyond. This week, join Bernard Yaros, Lead Economist, as he examines the impact of a potential Democratic sweep of the White House and Congress.
Read more: Modeling the economic impact of a Democratic sweep | Beyond the Headlines

Navigating the Economic Transition | Beyond the Headlines

How much of the picture for 2025 is dependent on the US labour market? In this week’s video, join Oliver Rakau, Associate Director, as he discusses whether there will be a divergence between centrals banks going into 2025.
Read more: Navigating the Economic Transition | Beyond the Headlines

Economics for Asset Managers

Read more: Economics for Asset Managers