Economic Outlook

ECONOMIC OUTLOOK

Labour markets will remain key

Still tight labour markets have kept developed economies afloat despite monetary tightening. Wages and labour productivity will now be key to how fast inflation eases and whether companies can maintain strong margins.

Labour markets remain exceptionally strong after Covid and Ukraine shocks. Despite successive shocks, employment has been rising strongly in the United States and to a lesser extent in the United Kingdom and euro area. Circumstances and drivers vary from country to country but there are some common factors. First, expansionary fiscal and monetary policies have kept firms healthy and supported demand, encouraging enterprises to add to their workforce. At the same time, labour market participation rates have fallen for short-term reasons linked to Covid (health problems, resignations) and more structural effects (squeeze on migration, ageing population). The resulting pressure, particularly in certain sectors, meant companies were keener to retain employees, helping push up wages more widely.

This in turn has been a major contributory factor to the resilience shown by developed economies.

Productivity will be key to growth... An interesting aspect of the situation is that job markets have held up in different countries with widely differing economic performances. The United States economy has boomed along while Europe's has seen a serious slowdown. As a result, labour productivity has been improving in the United States but worsening in Europe. Assuming it can maintain at least part of its productivity edge the US economy should continue to outperform over the next few months. In Europe, however, activity is likely to remain more modest.

…and to inflation. Healthy labour markets have meant higher wages for workers which have partly fed through to prices, a process likely to continue in the United States’ high-performing economy. Europe, too, is likely to see similar propagation despite sluggish activity. If productivity remains weak, companies may find themselves tempted to pass on rising payroll bills to selling prices.

Central banks are alert to the threat. Labour market dynamics and productivity gains will be key to economic and inflation prospects. Central banks will be keeping a close eye on developments and are likely to tread carefully on monetary policy. In our view, they are likely to start easing policy in near-synchronisation starting in the spring but will only make three cuts by the end of 2024.

Past performance does not prejudge future performance. Investments may be subject to market fluctuations, and the price and value of investments and the resulting revenues may fluctuate downward and upward. Your capital is not protected, and original investments may not be recovered.

Labour productivity (output per worker)