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Jobless recovery becoming a real risk for Europe's economy

Zurich

WITH job cuts mounting and costly furlough programmes that can't last forever, Europe is at risk of a devastating increase in unemployment that won't be easy to reverse.

Economies across the continent are recovering and company sentiment is brightening, but it's a different story when it comes to hiring. After months of crisis, the outlook remains too uncertain for firms to commit to spending. Many may not even reinstate all furloughed workers when governments end subsidies that kept millions on payrolls.

All that raises the prospect of a job-poor - or even jobless - recovery, where unemployment stays high for a prolonged period even as growth appears to pick up. That could threaten consumer demand, hitting retailers, restaurants and bars that are already struggling, and feeding a damaging loop through the economy.

"The initial phase of the recovery will be jobless, and that's very typical for a European recovery," said Nick Kounis, an economist at ABN Amro. "A lot of the job losses are still ahead of us."

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The potentially bleak employment outlook for Europe underscores how even a combination of policies that generally set the continent apart both in halting the spread of the coronavirus and mitigating its economic fallout can't ultimately protect labour markets.

In the euro area, unemployment could hit almost 10 per cent by the end of the year as the economy slumps, according to a Bloomberg survey. A rebound in growth in 2021 won't be enough to reverse the damage. UK joblessness is forecast to reach 8 per cent, more than double its tally earlier this year.

Furlough schemes to subsidise payrolls in the eurozone's four biggest economies supported 26 million people at their peak, according to Bloomberg Economics. But, even with such huge programmes, the fallout on jobs is spreading. In recent weeks, Airbus SE, Commerzbank AG and Sanofi were among major companies to signal staff cuts.

The situation could deteriorate further once furloughs are wound down. If business hasn't recovered enough when that happens, dole lines will grow.

"The worst of the impact on labour markets may be yet to come", European Central Bank executive board member Fabio Panetta said this month. "Some workers on short-time work schemes and temporary lay-offs may not be able to return to their jobs, and hiring looks likely to stay subdued".

At Bank of America, analysts point to the European Commission's monthly confidence data, where the jobs outlook in key economies is lagging that for industrial output.

"If production expectations improve more than employment expectations, the recovery may be job-poor, with implications for the labour market and household consumption", economists including Ruben Segura-Cayuela and Evelyn Herrmann said in a report.

That prospect is already troubling consumers. An Ipsos Mori poll covering 27 countries showed their second-biggest worry after the coronavirus was unemployment. In France, Italy and Spain, it's the top concern, even more than the virus that killed almost 100,000 in those three nations.

Policy makers are acknowledging the dangers, highlighting issues such as scarring in the labour market as millions lose work.

"Layoffs in the wake of bankruptcies are likely to leave many jobseekers struggling to retain their skills and attachment to the labour market," the European Commission warned on July 7.

The Bank of England sees a threat of higher and more persistent unemployment. When its chief economist, Andy Haldane, offered a relatively optimistic take on the economy last month, it was tempered by labour-market worries.

"Of these risks, the most important to avoid is a repeat of the high and long-duration unemployment rates of the 1980s, especially among young people", he said.

Governments are desperate to get ahead of the problem. UK Chancellor of the Exchequer, Rishi Sunak, announced a new programme to protect jobs this month to counter what he described as "the most urgent challenge" of unemployment. That announcement came two days after an Opinium survey showed almost half of businesses expect to cut staff when Britain's furlough programme ends in October.

German politicians are currently discussing an extension of their own programme, while France has created a furlough mechanism that could last up to two years for companies that strike deals with unions on reduced working time in exchange for job guarantees. The French government has also pledged an annual incentive of as much as 4,000 euros (S$6,360) for hiring young people.

The costs of such measures are too high for politicians to make them permanent, even if central bank bond-buying stimulus has bought them room for manoeuvre by containing yields for now. Analysts also wonder if even all that support will be enough to mitigate permanent economic damage. BLOOMBERG

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