By Robertson, Charles
MON, JULY 3 2017-This piece was prompted by the news last week about some companies hiking wages in central Europe. It is something we flagged as a likely 2019-20 inflation/interest rate issue when we published our Shrinking Workforce piece in 2014. It looks like this pressure may be coming earlier than we expected.
Looking into the employment rate data – we find that a number of European countries are now recording the highest employment rates they have seen since at least 2006, including Switzerland, Germany, the UK , Poland and even Turkey.
Even countries that are still years away from reaching peak employments rates, like Spain and Greece, have managed to increase their employment rates by 3-5pp from the lows.
Unless there is an unexpected recession, many of these labour markets will get even tighter in the years ahead, due to demographic trends. Czech Republic, Hungary and Poland, for example will see a 5% fall in the working age population over 2015-20, giving an annual reduction in the workforce of some 1% a year. For countries already at peak employment rates, this means wage pressures are likely to pick up.
So far wages are only rising by around 4% YoY in central Europe, so interest rates are at record lows in central Europe. The Czech Republic is expected to hike rates first in central Europe.
We think this is likely to encourage firms who are looking to expand mid-tech manufacturing, to widen their geographic horizons. We think there will not be the available labour in central Europe to attract new waves of such investment (CE3 will move up the value added curve to high-tech manufacturing). We assume companies will focus instead on Morocco, Tunisia, Egypt and Turkey. Labour markets in North Africa and Turkey will continue to expand in the next few years.
This is likely to require more MENA women to enter the workforce. We think it is plausible because the proportion of females aged 11-17 attending secondary school reached 80% in all countries about 15 years ago (except Morocco, which is still not quite there).
We suspect Turkey is leading the way. The vast majority of its rising employment rate, has been driven by including more women into the workforce.
We don’t have reliable comparable data for wages in the MENA region, but a comparison of per capita GDP figures and Eurostat wages data, implies that MENA wages are well below central European levels.
CONCLUSION: Wage growth is likely to accelerate in central Europe. We think wages growth is likely to be capped in North Africa and Turkey by the combination of a rising workforce in absolute numbers AND a rise in female employment, which could expand the existing workforce by at least 50%. We expect the wages gap between Europe and the MENA region will widen. Job creating FDI should therefore be increasingly attracted to north Africa and Turkey. Relative political stability favours Morocco doing well from this, the magnetic effect of the existing FDI stock favours Turkey and Morocco, the rise in the number of young people favours Turkey and Egypt. All of these and Tunisia have cheap or fair value currencies based on our REER model.
Robertson, Charles -Global Chief Economist at Renaissance Capital: CRobertson@rencap.com: Twitter @Rencapman