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Global: Resilient growth, but slowdown still ahead

The global economy has surpassed our initial expectations, averting a potential 'stagflation' scenario for the time being. The reopening of the Chinese economy post-COVID, along with the resilience of the U.S. and eurozone economies in the face of high energy prices, is providing some relief to global growth in 2023. However, the impact of monetary tightening on demand has yet to be fully realized, resulting in a subdued outlook for 2023 and 2024. 

With the decline in energy prices, headline inflation has surpassed its highest point. However, in key economic regions like the eurozone and the U.S., core inflation (excluding energy and food) has remained persistent. This can be attributed to the gradual recovery of demand following the pandemic. The need for additional central bank rate hikes could potentially push GDP growth in the U.S. and eurozone into negative territory or close to it.

As consumer preferences pivot towards services like travel, hospitality, and events, various sectors of the economy are expected to alternate between contraction and expansion. While the overall economy may avoid a complete recession, certain countries, notably the U.S., may witness successive sectoral recessions as a significant aspect of the narrative in early 2024.

As fear of a possible recession rise, businesses continue to scale back their hiring plans

Amid the uncertain economic outlook, companies globally have scaled back their hiring plans relative to last year. At the same time, labor shortages in numerous countries are leading to increased competition for a limited workforce.

Employers are gradually regaining bargaining power as labor market cools down

While countries such as the U.S., UK, Canada, India, Ireland, and more recently France are exhibiting increased slack in their labor markets, with LinkedIn's measure of labor market tightness approaching pre-pandemic levels, several European nations like Germany, Italy, and the Netherlands still face tighter conditions compared to their pre-pandemic baseline. This cooling trend implies a potential shift in the balance of power, indicating reduced influence for workers in the job market. As a result, this development will likely contribute to a slowdown in wage pressures.

Job seekers are searching more frequently, realizing that they may no longer have the luxury to take their time

Increased uncertainty in the outlook is leading to a surge in job seekers' search activity. More individuals are actively seeking secure employment opportunities, with some reentering the labor market. Notably, the U.S. has seen a significant 35% year-on-year increase in the number of job applications per applicant on LinkedIn. The United Kingdom, Ireland, and Canada have also experienced notable spikes in job search intensity, with increases of 39%, 30%, and 30% respectively. Italy and India saw more modest increases at 15% and 13% respectively. The UAE, on the other hand, witnessed a slight decrease in search intensity, likely influenced by the summer and vacation season.

U.S.: While still tight, the labor market is cautiously cooling

The probability of a U.S. recession in the coming year has declined, as the risk of a disruptive debt-ceiling fight has disappeared and stress in the banking sector appears to be only a modest drag on the economy. Pent-up savings, high employment, and increasing wage growth have helped consumers keep the economy afloat in the face of rising interest rates and banking sector jitters. As long as consumer spending remains strong, the economy is unlikely to enter a full-fledged recession.

However, signs of vulnerability are emerging. U.S. consumers are becoming more cautious, leading to a gradual increase in the personal savings rate and a slowdown in consumption. As a consequence, certain sectors of the U.S. economy are expected to experience a deceleration towards the end of 2023. 

The labor market continues to cool, but only at a gradual pace

According to one of the Federal Reserve's key indicators, the ratio of job openings to unemployment, the labor market has begun to show signs of easing. LinkedIn's measure of labor market tightness, which has a slightly different definition than government data (includes all job seekers, not just the unemployed), indicates more slack than government data implies. In June, there was 1 job opening for every 2 active applicants on the platform, marking a significant slowdown compared to the previous peak of 1 job opening per applicant observed in the last months of 2022.

Significant year-over-year hiring declines continue across diverse industries in the U.S.

June 2023 witnessed a 2% decline in hiring across all industries in the U.S. compared to the previous month of May 2023. Furthermore, national hiring in June 2023 experienced a significant 20.9% drop compared to the same period in the previous year, June 2022. However, there are signs that the decline in hiring is starting to stabilize.

The most impacted industry in terms of hiring continues to be the Technology, Information, and Media sector, which saw a staggering 42% decrease in hiring compared to the same period last year. Retail and Wholesale sectors also faced substantial challenges, with YoY hiring rates dropping by 32% each. Real Estate and Equipment Rental Services experienced a 27% decline in hiring, closely followed by Professional Services at 24%. Other industries also faced significant declines, such as Manufacturing and Transportation, Logistics, Supply Chain, and Storage, which both saw a 22% reduction in hiring. Financial Services and Accommodation and Food Services also experienced notable declines at 21% and 19%, respectively.

Workers are staying put amid the global uncertainty

The short tenure rate, or STR, which measures the fraction of positions that end after being held for less than a year, has decreased across industries over the past year. 

Short tenures started a growth spell in August 2021 that peaked in March 2022 when the STR was up 10.25% year-over-year. However, due to the current slowdown in the labor market, workers are now staying in their positions for longer durations compared to the previous year, resulting in a year-over-year decrease of -5.46% in STR as of June 2023. This suggests that workers' confidence in the labor market is waning and their expectation to land jobs elsewhere is declining. After all, there are less jobs available for every active job seeker today compared to the trend of the last two years.

Some industries are seeing a more prevalent decline in quick quitting than others, as shown in the chart below above. The STR in the technology, information, and media industry, for example, declined 12.6% year-over-year in June, meaning workers are leaving their jobs at a much slower rate this year compared to last year.

Long distance migrations are on the decline

Migration distances in recent years have exhibited a bimodal pattern, with more individuals moving either short distances (less than 25 miles) or long distances exceeding 3000 miles. This indicates a trend of shorter domestic migrations or movement to and from other countries. It aligns with previous studies highlighting a decline in long-distance migrations, suggesting reduced economic churn and worker reallocation. Additionally, men have consistently migrated farther than women, with men's median migration distance in 2022 being twice that of women's.

Younger generations, specifically Gen Z and Millennials, tend to migrate greater distances compared to older generations. In 2022, Gen Z's median migration distance was 194 miles, while for Gen X it was 34.3 miles. Furthermore, more educated workers tend to migrate longer distances. In 2022, individuals with graduate degrees other than an MBA had the furthest median migration distance (203.5 miles), while those with sub-Bachelor's degrees had the shortest median migration distance (38.9 miles).

Over the past five years, there has been an increase in migrations from principal cities to suburban and rural areas. The share of migrations from principal cities to suburban cores grew by 7.1% from 2019 to 2022, and migrations from principal cities to rural areas increased by 22.38% in the same period. This shift reflects the broader trend of remote work during the pandemic, with people opting to live outside cities. Industries associated with white-collar work, such as Technology, Information and Media, Professional Services, and Financial Services, have witnessed significant migrations from principal cities to suburbs. Popular suburban destinations include Beverly Hills, CA, Frisco, TX, and Leander, TX.

Eurozone: Tight labor market conditions persist in Europe

Despite the challenging global environment, the eurozone has shown a stronger position in 2023 than was expected six months ago. Several factors contribute to this improved outlook. The European gas price has experienced a significant decline, aided by reduced demand and the continued diversification of supply sources. Additionally, labor markets have remained robust. 

There is significant divergence across the region, with some countries experiencing decent quarterly growth rates, such as Portugal (1.6% q-o-q), Spain (0.5%), and Italy (0.6%), while others, like the Netherlands (-0.7%) and Germany (-0.3%), have witnessed disappointing growth. Indicators suggest that the growth momentum remains weak in Q2. The European Sentiment Indicator (ESI) declined from 96.5 in May to 95.3 in June, remaining below the neutral level of 100.

The labor market in the eurozone remains resilient. The latest unemployment figure for the area (6.5% in May) shows that the labor market is still tight. Total employment in the eurozone increased by 0.6% on a quarterly basis in Q1 of 2023, following a 0.3% increase in Q4 and Q3 2022. Employment growth is coming mainly from business services and public services. Construction is making a mildly positive contribution. In industry, we see hardly any employment growth in recent quarters.

Several European countries, such as Germany, the Netherlands, Spain, France, Sweden, and Ireland, are all witnessing a significant decrease in year-on-year hiring, with declines ranging from 17% to 28%. This decline can be attributed to both economic uncertainty and labor shortages in various industries. Despite this trend, there are still employment opportunities available, as the ratio of job openings to active applicants remains higher than pre-pandemic levels in most countries. Additionally, unemployment rates across Europe are historically low or close to them, indicating a relatively robust labor market. This resilience can be attributed to variations in downturns across different sectors and their timings.

One plausible explanation for the strong labor market is the practice of labor hoarding, wherein companies retain their workforce rather than downsizing during periods of weak demand. This strategy stems from diminishing concerns of a prolonged economic downturn, as businesses anticipate future rebounds in activity and aim to rehire their employees. The scarcity of jobseekers in a tight labor market further intensifies this hoarding behavior, presenting firms with additional challenges in competing for talented individuals. 

United Kingdom: Outlook is clouded by prolonged higher interest rates

While economic growth has slowed this year due to industrial disputes and temporary dip in economic activity caused by the extra bank holiday for the King's coronation in May, the overall figures mask the resilience of private consumption. Direct fiscal support provided to households to assist with energy bills has boosted consumer confidence to its highest level since Russia's invasion of Ukraine. The labor market remains tight, with an unemployment rate of only 3.8%, and total wage growth has accelerated to 6.5%. Although real wage growth remains negative at -2.0%, it is beginning to improve as inflation eases.

Within this tight labor market,  wage pressure is strong. Wage increases, which were running at about 4% in early 2022, are now running at close to 8%. Therefore, the BOE is evidently keen to suppress demand and thereby ease wage pressure. The UK labor market has seen a significant increase in slack, accompanied by a continuous decline in hiring since the previous summer, indicating reduced demand for workers. Recent data from June 2023 reveals a substantial year-on-year decrease in hiring activity, with a significant decline of 22.5% compared to the corresponding period in the previous year. Also, although energy prices have eased, food inflation is unusually high in the United Kingdom, with food prices up more than 18% from a year earlier. 

Asia Pacific: APAC’s labor markets remain resilient amidst weakening exports and inflation challenges

Domestic demand in Asia has, so far, remained strong despite monetary tightening, even as external demand for technology products and other exports from Asia is weakening. Headline inflation has been easing but remains above central bank targets in most economies. As commodity prices recede, core inflation is becoming a more important driver of headline inflation and is proving stickier.

Australia's labor market remains tight, with four job applicants per job opening in June, reflecting a slowdown from 2022 peaks but still above the early stages of the COVID-19 pandemic. The LinkedIn Hiring Rate is also down by 23% year-over-year. However, weakening domestic conditions pose challenges to the country's economic growth prospects. Growth is expected to significantly slow in 2023 and 2024, falling below its long-term trend, primarily due to persistent inflation and higher interest rates. Singapore's labor market exhibits comparable tightness, with nearly five applicants per job opening, aligning with the pre-pandemic average. The LinkedIn Hiring Rate is also down 34% year-over-year, and growth is expected to continue slowing. 

In contrast, India is experiencing a more rapid cooling down in its labor market, as there are approximately 20 active applicants for each job opening (compared to 17 last month). Hiring on LinkedIn is down by 26% year-over-year. However, the growth momentum, projected for 2023, is expected to wane due to a weakening trade environment and the delayed impact of earlier monetary policy tightening. In April, there was a decrease in price pressures, with headline CPI inflation dropping to 4.7% from 5.7% in March. This decline in inflation was observed across food, fuel, and major core categories. 

LatAm: Brazil’s economy grapples with high interest rates and policy uncertainty, while Mexico's growth weakens amid inflationary pressures

Brazil’s economy is experiencing a gradual slowdown due to the lingering impact of high interest rates, which is dampening demand. Factors such as lower external demand and policy uncertainty are also contributing to Brazil's growth challenges. The elevated inflation expectations and delayed start of the monetary policy easing cycle, now anticipated by the end of 2023, are affecting the growth outlook. 

Mexico's real GDP growth is expected to weaken in 2023 and further in 2024. The country has experienced one of the slowest and still incomplete recoveries from the pandemic. Its economic prospects are closely tied to the United States, and as the U.S. economy loses momentum, Mexican exports and remittance inflows will be curtailed. Moreover, elevated inflation and the lagged effects of monetary policy tightening are restraining domestic consumer demand and business investment. Although inflationary pressures have eased, they remain above the central bank's target range. Core inflation remains elevated as well, indicating cautiousness on the part of the central bank. An easing cycle may not begin until the last quarter of 2023 or even 2024.

Labor market tightness in Brazil has been witnessing a notable slowdown, steadily approaching pre-pandemic levels. This trend indicates an improvement in labor supply along with a gradual decline in openings. On the other hand, Mexico has been experiencing a more gradual transition, with labor market tightness slowly moving closer to its pre-pandemic level. 

MENA: While Gulf economies will decelerate the most in 2023, growth remains uneven across countries

The MENA region is projected to experience a slightly slower growth rate in 2023 compared to the average of the previous decade. The momentum of oil producers is expected to decline due to the implementation of OPEC+ quota cuts. While Gulf economies will decelerate the most in 2023, growth remains uneven across country groups. Additionally, North Africa will face challenges due to drought, further impacting its economic progress. The region as a whole will be negatively affected by rising interest rates and a sluggish global economy. 

In the UAE, economic growth is projected to slow in 2023 compared to 2022 due to factors such as a decline in global economic activity, stagnant oil production, and tightening financial conditions. Following tighter OPEC+ production quotas, oil GDP is projected to grow by 2% in 2023 and increase to 2.8% and 3% in 2024 and 2025, respectively. Inflation rates are expected to remain subdued at around 3.4% in 2023 due to a stronger U.S. dollar, tighter monetary policy, and falling global commodity prices. Following a period of cooling down, the labor market in the UAE is displaying indications of stability, as year-over-year hiring has decreased by only 17.8%.

In Saudi Arabia, economic growth is projected to slow down from 8.7% in 2022 to 2.9% in 2023. Stagnant oil production, as Saudi Arabia adheres to OPEC+ production quotas, will limit oil sector growth. However, the strong oil price backdrop will support credit growth and mitigate the impact of tighter monetary conditions on consumption. Non-oil sectors are expected to grow by 4.1%, offsetting the slower growth in the oil sector. The combination of a relatively strong U.S. dollar, restrictive monetary policy, and controlled domestic fuel prices will keep inflation subdued at 2.4%.

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The insights presented in this newsletter were made possible thanks to the work of LinkedIn data scientists Yao Huang, Murat Erer, and Caroline Liongosari.