Economists predicting jobless recovery

Europe may return to modest growth in 2010 but economists are warning that unemployment will remain high amid fears that recovery will be painfully weak.

At a conference in Brussels yesterday (14 January), analysts forecast another tough year ahead, adding that the risk of a W-style or “double dip” recovery could not be ruled out. 

The event, hosted by the European Policy Centre (EPC), focused on growth and jobs but economists made it clear that rising GDP would be no guarantee of improved employment numbers. 

Jørgen Elmeskov, deputy chief economist at the OECD, predicted “continued but very slow recovery” in the OECD area. He said the situation in Europe was less encouraging than in the US, where unemployment is close to its peak. 

However, he said there were some tentative signs that confidence had been restored to the markets, evidenced by healthier securities and corporate bonds markets, which are making it easier for larger companies to raise capital. 

World trade was also rebounding, driven by strong performances in the so-called ‘BRIC’ countries – Brazil, Russia, India and China – all of which had implemented effective policies for dealing with the crisis. “In particular, the policy-induced recovery in China has been amazing and we’re forecasting growth above 10%,” said Elmeskov. 

He said house prices could also bottoming out in a number of countries, but added that there is a “nagging doubt” about whether property values have truly hit the bottom, warning there could be a second leg of price drops. 

Payback time as recession ends 

Shaky financial institutions and burgeoning government debt stand out as major threats to recovery, according to economists. Governments must walk a fiscal tightrope in trying to cut spending as this can have spill-over effects in the real economy – discouraging consumer spending and hitting business confidence. 

Fabian Zuleeg, chief economist at the EPC, said there was “little scope for optimism” on the job creation front. Unemployment, he noted, tends to lag behind economic growth. 

He also highlighted disparities across Europe in how badly the jobs market was hit by declining GDP. Spain, he said, had seen its GDP fall in line with the EU average while its unemployment rate had soared and was headed for 20% – double the European average. 

Looking at the longer-term prospects for Europe’s labour market, he said employment might not pick up if sluggish growth hovers around the 1.5% mark. 

“We are moving out of the crisis, not into recovery but stagnation. Will we ever get back to where European economies were before the crisis? It’s highly doubtful. Labour markets will be affected long term,” Zuleeg said. 

Demographics and the need to tackle climate change will also serve to exacerbate the problem, he added.

EU executive sounds note of optimism 

If there was an optimist among the assembled ranks of dismal scientists, it was István Székely, director for economic studies and research at the EU executive’s economics and financial affairs directorate (ECFIN). 

He said the market is looking considerably more optimistic than some outside analysts, while global manufacturing is returning to where it was before the outbreak of the crisis. 

Székely compared the experiences of Japan and Finland, both of which were struck by devastating financial crises in the past. In Japan’s case, a failure to reform the financial system and tackle its problems head on resulted in a “lost decade” of stagnant growth. 

Finland, on the other hand, provides cause for optimism, he said. “It came out of a serious recession and caught up. It took 15 years to return to the growth trajectory it had before its crisis but, thanks to technology-driven efficiencies and a society that embraced innovation, Finland recovered,” said Székely. 

He acknowledged that the short-term prospects for job creation in Europe were nothing to write home about. Unemployment will continue to rise until 2011, he said, and even then the upturn will be slight. 

Göran Hultin, EU affairs advisor to the employment agency Manpower, said a survey of 71,000 employers in 35 countries showed improved confidence compared to this time last year. 

Employers were less likely to foresee layoffs in 2010, although he said this marked a plateau in job losses rather than growth in recruitment. "Yes there is stabilisation in the jobs market but it's very fragile, very weak," he said. 

The OECD's Jørgen Elmeskov said the levels of public debt accumulated during the financial crisis are unsustainable, but added there is a limit to how quickly this can be reversed. He said governments have to convince the bond markets that they are serious about getting back on the straight and narrow. 

"Only half of OECD countries have a plan for how to do it. They have to prove they have a plan, and they have to take action now," he said. 

Financial markets across the globe went into a tailspin following the US sub-prime mortgage crisis in early August 2007, forcing central banks to make massive cash injections to keep the system rolling and fend off a possible liquidity crisis. 

In September 2008, the crisis stormed into Europe, pushing member states to rescue banks and help the economy to recover from the worst depression in decades. 

The response to the crisis by European governments has helped dampen the impact of the recession, with a number of governments implementing short-time working schemes to contain job losses and others pumping billions of euro worth of stimulus spending into their economies. 

France and Germany technically emerged from the recession in the second quarter of 2009, followed by a number of other eurozone countries at the end of the year. However, unemployment is still hitting double digits in most EU countries, and business confidence is mixed at best. 

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