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November 29, 2022

Labor market remains strong amid high inflation

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu

 The first September inflation reports are in and they are not good. But the labor market seems not affected. In the European Union and in the US the unemployment remained at low levels, but there are some exceptions.

The Eurozone inflation reached 10% and is far from stabilizing. The same percentage was seen in Germany and Slovenia. So far the largest August inflation was posted in Poland where prices went up 1.1% compared to the previous month to reach an annual inflation rate of 17.2%. This is the highest percentage in more than 20 years. The increase in inflation was attributable to higher prices for food and energy, amid falling gasoline prices. The surprise was given by France where the Consumer Price Index rose with 5.6% in September 2022, slowing from 5.9% in the previous month. This was due to a slowdown in energy prices and to a lesser extent in services prices. However, food prices are forecasted to continue rising.

The recession fears leading to the recent decreases in crude oil prices is worrying the OPEC+. Therefore there are reports that the organization is considering an oil output cut of more than one million barrels per day. If materialized this will be the largest move since the Covid pandemic.

It is clear that in assessing the effectiveness of their monetary policies, the Fed, the ECB and all other Central Banks are looking, among others, at possible changes in the labor markets. So far in Europe and the United States, the markets are resilient. In Romania, the latest August data is showing a slight decrease in the unemployment rate to 5.1%. The EU average is at 6% but not all countries are having these low figures. In Spain and Greece unemployment is over 12% and in Italy and France it is over 7%. Despite its high inflation and high interest rates, unemployment in Poland is close to the one in Romania at 4.8%. Czech Republic, and Hungary are at 3.4%. The August data from the US is showing a 0.2% increase in unemployment to 3.7%.

According to Isabel Schnabel, a member of the Executive Board of the ECB, due to the acute worker shortage, the firms may be forced to hoard labor during the economic downturn. The decline in real wages reinforces this, making hoarding more attractive.

The latest European Commission survey shows that the share of firms reporting financial constraints as limiting production remains near historically low levels, mentioned Schnabel. Bank lending to firms even expanded notably in July and August from already elevated levels, and firms continue to add new jobs, suggesting that monetary policy continues to stimulate growth and employment. Considering these data and the above-target medium-term inflation outlook, Schnabel emphasized that further increases in ECB key policy rates will be needed to ensure that inflation returns to the 2% target in a timely manner.

We will see this week how the Fed monetary policy, that is several rate hikes ahead of the ECB, is affecting the labor market in the US when the nonfarm payrolls and unemployment data will be published on friday. The analysts’ survey is forecasting another 265,000 workplaces and unemployment remaining at 3.7%. The markets are looking for any signs that the labor market is cooling with hopes that it will ease inflation, and calm the Fed.


Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.

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