A hot German labor market is set to lead to further interest rate hikes in the Eurozone

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German jobs are at a high post-reunification in 2022, as labor market strength in the eurozone’s largest economy is expected to raise the prospect of higher interest rates despite recession risks.

About 45.6 million people will be employed in Germany in 2022, 589,000 more than the previous year and more than at any time since German reunification in 1990, according to the country’s official statistics agency.

The jobs market across the eurozone remained tight despite weak growth during the fall and the prospect of a winter recession, with unemployment reaching a new low of 6.5 percent in October – the latest month for which data is available.

Separate data from the S&P Global German Purchasing Managers’ Index – or PMI – published on Monday also showed that German manufacturers continued to hire workers at a steady pace in December despite the majority’s reports of hiring. Employment also rose in December across Eurozone firms.

The strength of the labor market has fueled fears of higher wage growth among the region’s rate-setters, who are tasked with keeping inflation in check.

Bert Cullen, chief economist at ING, expected the eurozone labor market to remain “tight despite the recession,” adding that companies are likely to keep people on the payroll to make sure they have quality workers available when the downturn ends. “Modest upward pressure on wages is set to continue,” Cullen said.

Markets are pricing in a 50 basis point increase in interest rates when the European Central Bank meets on February 2nd. That would be 2.5 percentage points higher than the hikes since June last year, as rate-setters battle inflation, which hit 10.6 percent in October – its highest level on record. The deposit rate was 2 percent in December.

An increase in both foreign and domestic workers contributed to Germany’s record high, which was 292,000 above the previous peak in 2019. The unemployment rate fell to 2.8 percent – another drop after reunification.

A European Commission poll published in December showed that during the last quarter of 2022, more than two out of five German companies reported a shortage of workers, just short of the highest share ever, a figure recorded in the third quarter. from last year.

Labor shortages are widespread throughout the eurozone. About 30 percent of companies in the eurozone experienced this during the last quarter of 2022, which is another near-record level.

The labor market is closely watched by the European Central Bank, as wage growth is seen as likely to prolong the bout of high inflation in the region. Price growth fell slightly in the year through November, but remained around five times the European Central Bank’s 2 per cent target.

At the ECB’s December meeting, Christine Lagarde, the bank’s president, noted that wage growth across the eurozone was “consolidating”, supported by strong labor markets and some catch-up in wages to compensate workers for high inflation.

She added that central bank employees expect wages to grow at rates well above historical averages and to push inflation above target between now and at least 2025.

Economists polled by Reuters expect inflation in the eurozone to fall into single digits when December data is released on Friday. However, core inflation – which excludes changes in energy and food prices, and closely reflects core price pressures – is expected to remain at a record high of 5 percent.

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