Strong economic data point to shallow eurozone recession

Eurozone unemployment hit a new record low as output from German factories rose in November, raising hopes for a softer-than-expected economic downturn in the single currency area.

Figures from Eurostat, the European Commission’s statistics office, showed that the number of people out of work fell slightly in November. Eurostat reported 10.849 million unemployed workers, 2,000 fewer than last month and the lowest since records began. The unemployment rate remained unchanged from October at 6.5 percent.

Meanwhile, Germany’s federal statistics office reported that industrial production rose 0.2 percent between October and November, a slightly better reading than the 0.1 percent expansion forecast by economists polled by Reuters.

Franziska Palmas, senior economist for Europe at Capital Economics, a research firm, said the increase confirmed that the German manufacturing powerhouse held up “better than expected” during the final quarter of 2022.

Germany’s statistics office will release its first estimate of GDP for the past year on Friday, which economists expect will show the economy shrank by a modest amount in the last three months of 2022.

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A spike in energy prices last spring after Russia’s invasion of Ukraine sparked concerns about energy shortages and a deep recession in the eurozone. However, economists have steadily upgraded their growth estimates in recent months on the back of better-than-expected incoming data and falling wholesale gas prices.

Investor sentiment on the eurozone economy has also improved. The Sentix market sentiment index, also released on Monday, showed a third straight rise in January to its highest level since June 2022. “Investors are hoping for a mild recession,” said Sentix managing director Patrick Hussy. .

The resilience of the eurozone economy and its labor market is expected to lead to more increases in policy rates by the European Central Bank.

With unemployment stuck at historically low levels, “the ECB’s hawkish tone is likely to double down on further tightening in the coming months,” said Paolo Grignani, economist at Oxford Economics.

Markets are pricing in a 50 basis point hike in interest rates when the ECB meets on February 2. That would be on top of a 2.5 percentage point increase since June last year, which took the benchmark deposit rate to 2 percent. in December.

A tight labor market could boost wage growth and keep core inflation higher for longer. While headline inflation fell single-digit in December to 9.2 percent, core inflation – which excludes changes in food and energy costs and is seen as a better gauge of longer-term price pressures – rose from 5 percent in 5.2. percent.

The strength of the labor market “makes it a key risk to the effects of the second round of inflation for the ECB,” noted Bert Colijn, senior eurozone economist at ING. With such a tight labor market, “it is unlikely that unemployment will rise enough to make job shortages a thing of the past,” Colijn added.

Between October and November, the unemployment rate fell in Italy, France and Spain by 0.1 percentage points to 7.8 percent, 7 percent and 12.4 percent respectively. It remained at 3 percent in Germany.

Melanie Debono, senior economist for Europe at Pantheon Macroeconomics, said fiscal support across the eurozone should prevent “a significant rise in unemployment” despite the economic downturn.