Economy

Analysis – Europe Inc.’s wage hikes worry investors as recession fears grow

Analysis – Europe Inc.’s wage hikes worry investors as recession fears grow

By Joyce Alves and Josephine Mason

LONDON (Reuters) – Plans by European companies to raise wages and pay one-time bonuses to help employees weather a harsh winter have alarmed investors worried that the extra cost could hurt profits and undermine the region’s economy.

Stellantis and LVMH are among a slew of companies offering one-time bonuses to most employees to help with food and energy bills skyrocketing during the winter.

While these payments are relatively easy for multinationals to absorb, the biggest concern is that many of them are also negotiating annual wage reviews or agreeing to unscheduled wage increases.

Most British retailers have raised watch prices twice this year, Carrefour (EPA:) Offered a wage increase and a one-time payment and Stellantis will begin salary negotiations in France in December rather than early next year.

Trade unions have called for better wages as well to reflect inflation in the euro zone, which hit a record high of 10% in September. Italian unions representing workers in Stellantis, Ferrari (NYSE:), Iveco and CNH Industrial (NYSE:) will demand wage increases of more than 8% in 2023 in talks starting this week.

On Sunday, TotalEnergies offered to advance wage talks, responding to union demands, as it sought to end a strike that had disrupted supplies to nearly a third of French gas stations and prompted the government to tap into strategic reserves.

That’s mounting pressure on executives already grappling with rising costs for energy, food, raw materials, credit and faltering supply chains that have boosted shipping costs, delaying recovery from the COVID-19 pandemic.

Until now, many companies that make everything from cars to pet food and ice cream have made extra costs through price hikes.

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A warning from global fashion retailer H&M, the world’s No. 2 that demand is falling, indicates that shoppers and consumers are starting to get frustrated, raising concerns that companies may struggle to continue with this strategy.

In interviews, investors, analysts and strategists have painted a bleak picture for the remainder of 2022 and suggested even greater challenges in the year ahead.

Hani Reda, global multi-asset portfolio manager at PineBridge Investments, expects Europe to sink into recession in the fourth quarter.

“It could lead to a complete collapse of margins, because then we’re not just talking about higher wage pressure that squeezes margins a little bit.”

Stephane Ecolo, global equity strategist at Tradition in London, said he expects the upcoming third-quarter earnings season to be marked by weaker-than-expected earnings or earnings warnings, putting pressure on stocks.

“Wage increases will continue to fuel inflation and should be harmful to companies’ margins as they continue to face rising costs at the same time,” he said.

Europe’s main index has fallen nearly 20 percent this year, on track to its worst performance since the global financial crisis in 2008.

very optimistic

Eurostat said corporate costs in the euro zone rose 43.3% in the year to August, more than double US levels. According to Bernstein, about half of industries in the region have cut profit margin forecasts since the beginning of the year.

However, companies included in the STOXX 600 regional index are expected to post a 32% rise in profits in the third quarter, driven by utilities and energy companies buoyed by higher oil and gas prices, according to Refinitiv I/B/E./S data. Excluding energy, earnings growth will be 11.8%.

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This is a slight uptick from the second quarter and down from the massive 60% growth in the corresponding period last year, which was skewed by a rebound in activity after the shutdowns ended.

Analysts said that given the mounting headwinds, that could be overly optimistic. Nestle and Faurecia are among those results to be published next week.

And after the end of September quarter, the outlook is getting worse. Refinitiv data shows that earnings growth is expected to slow sharply to 19.5% in the fourth quarter and to just 1.7% in the first.

Europe Inc will fall into recession in the third quarter of 2023, with profits falling 3.8%, after a 4.4% decline in the second quarter, according to the data.

Graphics: STOXX 600 revenue and earnings forecast (https://fingfx.thomsonreuters.com/gfx/mkt/movanxdgypa/STOXX%20600%20revenue%20and%20earnings%20expectations.png)

double room

It is difficult to estimate the average size of wage increases for 2023, but economists expect them to be above average.

Katharina Keynes, chief economist at Oxford Economics, estimates that average annual negotiated wages will rise 4-5% next year, surpassing 2008 levels when there was a wave of big wage increases during the global economic crisis.

Sub-inflation hikes are sure to inflict more pain on households, and are likely to erode consumer demand at a faster pace.

For now, Florian Ilbo, multi-asset portfolio manager at Lombard Odier Investment Managers, believes that the market has not paid enough attention to the double whammy of higher inflation, including wages, and declining demand, which raises even more concern about rising borrowing costs such as prices. Benefit. go up.

“Stocks at the moment do not have a risk of a dip in earnings… the only thing discounted is higher rates, not lower demand.”

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Graphics: STOXX 600 performance (https://fingfx.thomsonreuters.com/gfx/mkt/znpneynrqvl/STOXX%20600%20performance.png)

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