MNI INTERVIEW: Risk EU Data Understates Wage Rises, Lobby Says

European businesses are reporting worsening squeezes on margins as external demand and domestic consumption are sapped by higher rates and wages rise at a pace which may not be reflected in official data, the Confederation of European Business’s chief economist told MNI, adding that the continent's companies may increasingly look to relocate production elsewhere.

While BusinessEurope’s forecast of 0.6% European Union growth in 2023, conditional on energy prices continuing to fall and no fresh geopolitical shocks, still looks plausible, BusinessEurope’s James Watson noted that some of the bloc’s economies are in technical recession. German car industry supply chains have benefitted from the easing of China’s Covid controls, but availability of some raw materials remains tight, he said.

“China reopening was a supply side boost in the autumn at the same time though members are also saying that external demand outside the EU is also weak,” Watson said in an interview. “So we have a supply side boost but a demand weakening at the same time and that is why we are getting sectoral weaknesses. As we see interest rates rise around the globe that impacts on global demand.”

Rising rates are also making consumers more cautious, while companies’ cost bases are being hit by one-off cost-of-living deals with workers outside of usual pay rounds, which Watson said may not be reflected in official data. (See MNI INTERVIEW: German Wages, Gov't Spending, To Fuel Inflation)

“Will they consistently make these one-off deals if labour markets stay very tight?” he said. “There was relative restraint through most of 2022 then signs that they were starting to pick up towards the end of ’22, which remains a concern for inflation.” (See MNI: Tough Spanish Pay Talks Key For Inflation Struggle)

GOVERNMENT SPENDING

BusinessEurope is also concerned by the still expansionary state of EU public finances.

“I have heard people talking about fiscal policy being neutral, but it is not,” said Watson, pointing to European Commission estimates of headline fiscal deficits equivalent to 3.6% of GDP this year, with more than 90% of that shortfall being structural.

States urgently need to strengthen public finances, and address long-term challenges such as ageing populations, the reconstruction of Ukraine and the need for higher defence spending, he said.

Europe must also address the danger of large-scale corporate relocations, according to Watson, pointing to chemical giant BASF’s decision to move some production to China and to lower taxes and green subsidies under the Inflation Reduction Act in the U.S.

“Clearly, BASF has been a big example of this. Siemens has indicated it will be more focused on the U.S. in the future and Audi has announced that is a high chance they will likely build an electric vehicle plant in the U.S. to benefit from manufacturing subsidies.”

While the EU’s higher energy prices and increasing regulatory burden are pushing companies away, manufacturing and tax incentives elsewhere exert a magnetic attraction, he said.

“The corporate tax changes made by Trump, they are also still acting as a pull factor. They made the U.S. more attractive as a place for corporate investment.”