Global Daily – When will the eurozone reach full employment?

by: Nick Kounis , Bill Diviney , Arjen van Dijkhuizen

Euro Macro: Still likely amble slack in the eurozone labour market – Figures published today showed that eurozone unemployment was stable at 8.6% in January, but down from 8.7% in November and 8.8% in October. What is the level of full employment in the eurozone and how long will it take the labour market to reach it? Well official estimates suggest that the labour market is now very close to full employment. For instance, the OECD estimate of the NAIRU is at 8.5%, while the EC’s estimate stands at 8.4%. The eurozone unemployment rate is currently falling at an annualised rate of one percentage point and indictors such as the composite employment PMI suggest that this trend will be sustained. This would suggest that the labour market will tighten significantly in the coming months. However, these official estimates of the NAIRU tend to be subject to revision and there is good reason to think that there still ample slack in the labour market. First of all, the low for the unemployment rate during the last cycle was 7%. In addition, since the financial crisis there have been significant labour market reforms in the eurozone, which show up strongly in surveys such as the WEF competitiveness report. These tend to reduce the NAIRU. Finally, broader measures of unemployment – such as the U6 indicator – are at even higher levels compared to the pre-crisis low. For instance, the most recent number for U6 unemployment stands at 18%, while the pre-crisis low was 15%. Essentially the headline unemployment rate is 1.6 percentage points above it pre-crisis low, while the broader measure is around 3 percentage points above it. We think that these might be more realistic ranges for slack than implied by the official estimates of the NAIRU, given the structural changes and reforms we have seen. Overall, the exact amount of slack is uncertain, but there is good reason to think we are still some way away from full employment for the eurozone on aggregate. (Nick Kounis)

US Macro: Economy continues to gain momentum – The ISM manufacturing PMI hit a new post-2004 high of 60.8 in February. The increase was driven by continued rises in the employment and prices paid components. This more than offset a modest cooling in the production and new orders indices, which remain at historically-elevated levels. Respondents reported increases in capital spending that they attribute to the recent tax cuts, while some of the price rises were attributed to dollar weakness. The rise in the employment index is particularly notable given the tightness in the labour market, and survey respondents continued to report difficulty finding workers. This was corroborated by another sharp fall in initial weekly jobless claims today – which, at 210k, are now the lowest they have been since December 1969. All told, the data suggests the US economy is continuing to gain momentum, and the picture is consistent with our above-consensus 3.0% growth projection for 2018. The data also suggests we are likely to see above-trend payrolls growth in the coming months. While it is possible – likely, even – that participation might increase a little to relieve the capacity constraints in the labour market, the strength in the economy suggests the unemployment rate could fall further below the NAIRU than the Fed is currently projecting. With that said, we continue to expect a recovery in productivity growth, driven by higher investment, to keep a lid on unit labour cost growth. (Bill Diviney)

China Macro: Manufacturing PMIs give mixed picture due to export subindex – The manufacturing PMIs for February published by NBS (yesterday) and Caixin (today) gave a bit of a mixed picture. The official one (NBS) – with a stronger focus on the larger, state-owned firms – dropped by a full point to 50.3, the lowest level since July 2016. By contrast, Caixin’s PMI (concentrating more on smaller and private firms) came in at 51.6, a touch higher than in January. The difference in direction is to a large extent explained by the export subindex. The official PMI’s export subindex dropped by more than four points to 45.9, whereas Caixin’s one dropped only marginally (from 52.4 to 52.0). This suggests that the (exporting) firms in the NBS survey are more affected by the LNY break and/or by the recent protectionist measures proposed by the US than the (exporting) firms in the Caixin survey. The official non-manufacturing PMI dropped as well, to 54.4 (January: 55.3); Caixin will publish its service PMI this Monday. All in all, given that the Lunar New Year break was fully concentrated in February this year, one should be careful in drawing hasty conclusions. Our baseline scenario foresees a resumption of the gradual slowdown in economic growth, as Beijing’s targeted tightening campaign – aimed at financial deleveraging while keeping credit to the real economy flowing – continues. Meanwhile, external risks are rising as the (US) trade protectionism dog has started to bite. See for more background our recent China Watch, No barking but biting in Year of the Dog. (Arjen van Dijkhuizen).