On Monday, Goldman Sachs (NYSE:GS) released an analysis on the euro area labor market, projecting a moderation in employment growth through 2025. The firm's nowcasting framework indicates a gradual slowdown in employment growth in Q4 and into 2025.
Contributing factors include the end of the positive hiring impulse from low real labor costs and a reestablishment of the historical relationship between employment and GDP growth. Goldman Sachs' below-consensus GDP forecast suggests a deceleration in net hiring by mid-2025, with employment growth potentially falling to 0.05% by year-end.
The labor supply is also anticipated to decelerate in 2025. Demographic challenges, such as a shrinking native working-age population, are expected to be roughly balanced by continued gains in the participation rate.
However, net immigration is projected to be the primary driver of labor supply growth in the coming years. Goldman Sachs forecasts a gradual decrease in immigration flows into the euro area, estimating quarterly labor supply growth to reach 0.09% by the end of 2025.
Despite these trends, Goldman Sachs expects the labor market to remain broadly balanced over the next few quarters, with only a modest increase in the unemployment rate. This forecast aligns with household expectations, which also suggest a slight uptick in unemployment.
Nonetheless, the risks are tilted towards a more significant rise in the unemployment rate, especially if the job finding rate turns around, indicating an equilibrium unemployment rate above current levels. Additionally, the Beveridge curve, which shows the relationship between job vacancies and unemployment, indicates that a further softening in labor demand could lead to job losses.
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