Europe’s Labour Market Shows Signs of Cooling, Easing Inflation Pressures

Europe’s labour market softened in the third quarter, with data on Monday indicating a decline in inflationary pressures, potentially paving the way for further interest rate cuts.

Labour cost growth in the eurozone slowed to 4.6% in Q3, down from 5.2% in the previous quarter, according to Eurostat. Meanwhile, the job vacancy rate dipped to 2.5% from 2.6%, continuing a downward trend that has persisted for nearly two years.

The European Central Bank (ECB) has been cautious in its rate-cutting measures, largely due to a tight labour market and rising wages driving service sector costs. However, as the economy cools, workers are moderating wage demands, focusing on job security in the face of potential economic downturns. This supports ECB President Christine Lagarde’s argument for further policy easing.

While firms have largely maintained employment levels, they have sharply reduced new hiring, effectively hoarding labour to prepare for future economic recovery.

Germany, the eurozone’s largest economy, experienced the sharpest drop in labour cost inflation, falling to 4.2% in Q3 from 6.0% in the previous quarter. Recent wage agreements by major German labour unions suggest further declines ahead, especially as the country faces a potential second consecutive year of economic contraction in 2024, driven by weak export demand and high energy costs.

Inflation-adjusted incomes in the eurozone have mostly recovered to pre-inflation surge levels, though productivity concerns have limited additional wage growth. Meanwhile, the job vacancy rate fell below 2% in the manufacturing sector and eased or stagnated across nearly all job categories, reflecting the broader slowdown in labour market dynamics.

The softening labour market bolsters the case for continued interest rate cuts, as inflationary pressures subside amid weakening economic activity and cautious hiring trends.