The US economy is well below its natural rate of unemployment and is adding payrolls at a rate of 437k a month (average three-month change). The unemployment rate tumbled 14 basis points to 3.46% in July, the lowest since May 1969. The U6 rate held at a record low of 6.7%.
By contrast, unemployment across the Eurozone edged up 25k in June, the first monthly rise since April 2021, led by Spain (+28k). Spanish unemployment climbed again last month, according to separate data from Spanish Ministry of Economy & Business: the increase in July (+56.9k) far exceeded that of June (+3.7k). German unemployment rose by more than expected in July as well (+47.6k). There are clear signs that labour demand is turning down: German job vacancies fell in both June and July, the first m/m declines in around two years.
The energy & food supply shocks will introduce greater labour market slack in Europe. The US unemployment rate could continue to fall towards 3% by end 2022, while the Eurozone jobless rate could head in the opposite directing, back up towards 7%.
The US will be a big beneficiary of the shift away from Russian gas over the next couple of years. The US is about to become a net petroleum exporter in real terms, whilst Europe remains in the throes of energy crisis that could unravel further. Even if the US CPI comes in soft for July, the USD could eventually make further gains against EUR and GBP.
There is still the risk of another squeeze higher in LNG prices heading into winter, as competition between Europe and Asia for gas supplies intensifies. Europe’s most extreme drought in decades is now reaching a ‘critical’ stage, exacerbating the current crisis. German and French Q3 2023 quarterly power contracts set new highs yesterday due to the hot weather, less Russian gas, and French power reductions.
The outlook for the UK has deteriorated rapidly: the BoE now projects that GDP will contract every quarter from 2022 Q4 to 2023 Q4, as inflation tops 13%. UK company insolvencies jumped in H1, as Covid support measures came to an end, portending a rise in the unemployment rate in H2. Cornwall Insight has again raised its forecast for the energy price cap to £4,266/year for Q1 2023 and it could reach as high as £4,426/year in Q2, heaping more pressure on the incoming Prime Minister.
