Euro-zone unemployment has much further to rise – Capital Economics

Share | (Barcelona) - Jennifer McKeown, Senior European Economist at Capital Economics suspects that the recent rise in the EZ unemployment rate is a sign of things to come and see the rate peaking at about 13.5% next year.

She feels that this, when combined with continued fiscal austerity, is likely to mean pretty sharp falls in household real income and hence consumer spending.

She highlights that the euro-zone's labour market downturn picked up pace again in September, with the unemployment rate rising to a new record high of 11.6%. The deterioration has already been far sharper than most forecasters had anticipated.

She notes that "the previously reliable employment indices of both the EC and PMI business surveys point to further annual falls in employment at around Q2's rate of 0.5%. If the workforce continued to expand at around its recent modest pace (as we expect), such job cuts would leave the unemployment rate at 12.5% by Q3 next year."

She feels that there are three reasons to think that the downturn will be worse than the surveys currently suggest. Firstly, they do not include developments in the public sector where further job cuts are already planned in France, Italy and Portugal.

Secondly, she believes that it is likely that employers have yet to react fully to the economic downturn that has already occurred. Developments in the labour market tend to lag behind those in the wider economy and the same applies to survey measure of employment compared to those of economic activity.

Finally, McKeown feels that the recession will deepen more than other forecasters anticipate. If the EZ undergoes a limited break up within the next year as expected, the associated falls in business confidence and general economic disruption will almost certainly lead to deeper job cuts.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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