EC survey follow-up: Germany unlikely to keep the boat afloat
 
We return to today's European Commission survey, looking specifically at the data on the labour market and updating our hiring intention indicator (3-month moving average normalised series). From this we draw two main conclusions:   

Germany is the only country among the main countries whose sentiment on future employment is levelling off at such high levels. This bodes well for the future performance of its economy, on top of its strong fiscal position.  

Bringing France, Italy and Spain into the picture, we believe that the gap between Germany and the rest of the euro area should increase. France's labour market is faltering badly, while those of Italy and Spain, while stabilising at low levels, have leeway to fall further due to the likely additional fiscal consolidation. Nevertheless, although it has a c.30% weighting of euro area GDP, Germany won't be able to generate a strong enough positive loop to offset the negative trends at play within its euro area partners, we believe.  

As a result, we expect the euro area unemployment rate to continue trending higher. Aside of a likely rise to 10.4% in the December print (to be released tomorrow), which would take the Q4 reading to 10.3%, up 0.2pp from Q3, we believe that the unemployment rate could reach 11.3% in Q4 12, only stabilising at the beginning of 2013.
 

Euro area: In negative territory for a second month in a row
 
Our hiring intentions index in the euro area has continued to deteriorate in January, albeit at the most modest pace since May 2011 (the beginning of the drop). It is now in negative territory for the second month in a row, at -0.2, the lowest level since August 2010. At the sector level, divergences were limited. The retail sector dropped the most by -0.1 pts, while the overall services index (normalised, 3mma) remained unchanged.
 
 
Germany: Holds up well
 
Thanks to a significant rebound in the services sector (+0.3 points) and to a lesser extent in the construction sector (+0.1 points), the overall hiring intentions index (not 3mma) improved from 1.36 to 1.51. Applying the 3mma, the rise was much more marginal from 1.46 to 1.50, hence staying at levels above the previous peak, which were the highest since 2001. In such a context, it is no surprise to see the labour market in Germany performing very well. Notably, in tomorrow's release, we expect the unemployment number to fall again in January, by 10k. Furthermore, considering that overall business confidence has started edging up, it should maintain the overall level of business confidence in the outlook at a fairly high level and therefore avoid a significant backlash on labour market conditions in the near future (provided that a full-blown financial crisis is avoided).
 
 
France: Falls at a steep pace
 
At the opposite end to Germany, France's services component (-0.3 points) pulled the overall index down strongly, as the industry, retail and construction sector indices just added to -0.1 points. As a result, the picture was negative across the board, and the overall hiring intentions index dropped another 0.14 points to 0, its sixth consecutive fall reaching the lowest level since September 2010. As one can see from the chart, the pace of deterioration is quite steep and has been echoed already in the hard data. As we pointed out in our last comment on jobseekers (France jobseekers: unemployment reached new highs; unlikely to stop there), the rise in unemployment should continue even if measures to curb unemployment were actually decided at the social summit earlier this month.
 
 
Italy: Stabilises for now...
 
Components at the sector level in Italy are overall offsetting each other, with the construction (+0.14 points) and industry sector (+0.07 points), being offset by the retail (-0.10 points) and services sectors (-0.03 points). As a result, our overall index remained almost unchanged at -0.71. Despite this stabilisation, the level of the index is already fairly low and considering the magnitude of the fiscal consolidation which lies ahead, to put the high debt-to-GDP ratio on a sustainable trajectory, we consider that the outlook looks rather weak.
 
 
Spain: Stabilisation is likely to be short-lived
 
The overall hiring intention for Spain remained broadly unchanged in January. This was in fact due to the result of two opposite forces that cancelled each other out in the end (+0.2 points in services versus -0.2 points in construction). According to our last update on the Spanish economy (see Euro themes: The policy challenges for the new government), we analyse how the government's efforts to reduce the deficit from 8% of GDP to 4.4% this year and 3% next year would have severe repercussions on growth. Hence, we have revised our 2012 and 2013 growth forecasts for Spain to -1.8% and 0.0% respectively (versus -0.6% and +0.9% previously expected). As a result, while the overall index seems to be levelling out for the moment, we consider that the measures to be announced to curb the fiscal imbalances of the country will have severe repercussions on growth which should logically affect the labour market as well. We now expect the unemployment rate to peak above 26% at the beginning of 2013 from 22.1% in Q3 11 (Eurostat data).
 
 
Portugal: A year of ongoing deterioration
 
Our overall hiring intention indicator in Portugal fell by another 1 tenths, breaching the bar of -2.0, as a result of 12 consecutive deteriorations. Negative prints were recorded in all sectors apart from the services sector which inched up just 0.06 points to -0.68. Compared with the three other sectors, it is the one which has resisted the most as the retail and construction sectors' are both at -2.5 and industry's is at -0.9.
 
 
Greece: Reaches a new all-time low, unlikely to stop there
 
In Greece, a major drop in the retail trade sector (-0.7 points), could not be offset by moderate gains in the three other sectors (services: +0.3 pts, industry: +0.2pts, and construction: +0.1pts). At -2.5, the index reached a new all-time record low, and is the lowest of all the countries listed here. Seasonally adjusting the series up to Q3 released last week by the Greek national statistical office, the country's unemployment rate rose to 18.5% from 16.7% in Q2. Considering the fact that further fiscal and structural measures are likely to be decided so that Greece can be granted a second bailout package, we would not be surprised if its growth prospects fall further in the coming months, with a knock-on effect for the labour market as well.


source: BarCap