• The ongoing recovery will only be sustainable if private consumption begins to pick up before the initial boost from the inventory cycle and exports fizzle out.
  • A precondition for this to happen is that the labour market stabilises. If it doesn’t we could get a nasty double dip.
  • History suggests that unemployment will peak in Q1 2010 – just in time for private consumption to secure sustainable growth.
  • Euroland PMI and other indicators signal that a peak in unemployment is imminent. Much of the evidence suggests that unemployment is peaking right now.
  • There are notable cross-country differences. Unemployment may already have peaked in Germany, while in Spain it might peak much later than the Euroland average.
  • There is a lot of tailwind at the moment compared to the 1993 recession, but risks remain high. We expect Euroland unemployment to peak at 10.1% in Q1 2010.

A sustainable recovery depends on the labour market

We expect above-trend growth in the next couple of quarters as the inventory reductions are brought to an end and exports make a partial rebound. Subsequently there is a risk that we will see a nasty double-dip. This will happen if domestic demand fails to pick up in early 2010. It is particularly important that private consumption begins to recover. After all this is by far the biggest demand component. We expect that it will, but are on the watch for signs that it won’t. If consumption does recover, we expect above trend growth in 2010.

A recovery in private consumption will depend on whether the labour market stabilises. Other things matter too of course. Low interest rates and tax reductions certainly help to get private consumption back on track. The continued slide on the housing market is pulling in the other direction. Nevertheless we find that a turn in the labour market is the key event that can spur private consumption in the current situation.

In this paper we examines whether a labour market stabilisation is imminent. First we look at historical evidence. Then we examine up-to date information from PMI and other indicators and look at cross country differences. Afterwards we examine whether labour sharing and the slump in labour productivity may delay the labour market stabilisation. Finally we look at headwinds and tailwinds compared with the situation in the 2001-2003 slowdowns and the previous recession in 1993.