Unemployment in the euro zone hit a new record low, while production at German factories rose in November, fueling hopes of a milder-than-feared economic downturn across the single currency area.
Figures from Eurostat, the European Commission’s statistical office, showed that the number of people without a job in the labor market fell slightly in November. Eurostat reported 10.849 million unemployed, down 2,000 from the previous month and the lowest on record. The unemployment rate remained unchanged from October at 6.5 percent.
Meanwhile, the Census Bureau said industrial production rose 0.2 percent between October and November, slightly better than the 0.1 percent growth forecast by economists polled by Portal.
Franziska Palmas, senior Europe economist at Capital Economics, a research firm, said the surge confirms Germany’s manufacturing powerhouse has “held up better than expected” in the final quarter of 2022.
Germany’s statistical office is due to release its first estimate of GDP for the past year on Friday, which economists expect the economy to have contracted by a modest amount over the final three months of 2022.
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A surge in energy prices last spring following Russia’s invasion of Ukraine sparked concerns about power shortages and a deep recession in the eurozone. However, economists have steadily revised their growth estimates higher in recent months on better-than-expected incoming data and falling wholesale gas prices.
Investor sentiment towards the eurozone economy has also improved. The Sentix market sentiment index, also released on Monday, showed the third consecutive rise in January to the highest level since June 2022. “Investors are hoping for a mild recession,” said Sentix CEO Patrick Hussy.
The resilience of the eurozone economy and its labor market is likely to result in further rate hikes by the European Central Bank.
With unemployment remaining at historically low levels, “the ECB’s dovish tone is likely to double if it tightens further in the coming months,” said Paolo Grignani, an economist at Oxford Economics.
Markets are pricing in a 50 basis point rate hike when the ECB meets on February 2nd. That would come on top of hikes of 2.5 percentage points since June last year that brought the key interest rate on deposits to 2 percent in December.
A tight labor market could boost wage growth and keep underlying inflation elevated for longer. While headline inflation fell to a single-digit 9.2 percent in December, core inflation – which excludes changes in food and energy costs and is considered a better measure of longer-term price pressures – rose to 5.2 percent from 5 percent.
The strength of the labor market “makes it a key risk for the ECB to second-round inflationary effects,” noted Bert Colijn, Senior Economist, Eurozone at ING. With such a tight labor market, “unemployment is unlikely to become so high that labor shortages will become a thing of the past,” added Colijn.
Between October and November, the unemployment rate in Italy, France and Spain fell by 0.1 percentage point to 7.8 percent, 7 percent and 12.4 percent respectively. In Germany it remained at 3 percent.
Melanie Debono, Senior Europe Economist at Pantheon Macroeconomics, said fiscal support across the eurozone should prevent “a significant rise in unemployment” despite the economic slowdown.