Labour Market Cooling, Amid Services vs Manufacturing Divide (1/3)

Today's Eurozone data showed a 0.2% Q/Q rise in employment in Q2 2023, the slowest since Q3 2022, and a deceleration from 0.5% in Q1. While the national breakdown is as yet incomplete, German jobs growth slowed to 0.1% from 0.2%, with Spanish and Dutch employment slowing sharply as well, helping offset an acceleration in French gains.

• The stagnation in German employment since the first half of 2022 is one of the key factors behind the slowdown, with the country accounting for over one-quarter of eurozone employment. Our estimates of the German Beveridge curve last week showed evidence of a German labour market which was off its tightest levels, but perhaps still too hot for inflation comfort.
• The dynamics of German unemployment claims since 2021 are shown in the chart below, plotting unemployment claims momentum (on a 3M/3M annualised basis) against the unemployment claims rate.
• Labour market tightness built up throughout 2021 as the economy recovered from the pandemic.
• The geopolitical and energy shock resulting from Russia's invasion of Ukraine prompted a sharp reversal higher in unemployment claims in summer 2022, before momentum faded to near zero at the start of 2023.
• Only in recent months has momentum in unemployment claims picked up again as demand and activity have weakened.
• For Germany, as in much of the Eurozone, the key is whether the ongoing cooling will continue to occur in manufacturing sectors, or if a deterioration in service sector employment will become more prominent.
• The IFO manufacturing employment barometer has been negative for the past 4 months, while the services employment barometer is on a 29 month streak of expansionary prints (albeit off from the highs earlier this year). For context: services jobs make up roughly 75% of total German employment, with manufacturing representing around 17%.

Source: Bundesbank, Federal Labour Office, MNI