A JOBLESS RECOVERY? If Europe follows the American pattern, we won’t see any significant growth in employment until the end of 2006. Increased demand for property will follow thereafter. ~~~ The American economy reached its trough in this cycle between March and November 2001. By the end of that year, output had begun to rebound. The job market, by contrast, has taken much longer to bounce back. Even now, although employment is starting to rise, it is making very slow progress. In most recoveries, output picks up before employment, usually growth in employment lags by about three months. In this recovery it has lasted nearly two years. If it had followed the course of most post-war economic cycles, 8 million Americans would have been employed by now. Instead, employment is still lower than it was when the recession ended. If this model were to be applied to Europe we wouldn’t see any significant growth in employment before the end of 2006. Bear in mind, too, that the US recovery is substantially more vigorous than anything foreseen for Europe over the next two years. Commentators point the finger at increased productivity as the root cause. Clearly, higher productivity growth means that fewer new jobs are created for any given increase in output. US productivity growth rose rapidly in the second quarter of 2003. However, productivity is an outcome of change. The real story here is that investment in information technology is making a real difference. As ever, expectations were balanced in favour of short rather than long-term gains. The rapid rise in US productivity seems to be the result of an overhaul of business processes needed to make the most of computers and related technology. |
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| How valid is the US model in a European context?
Certainly labour market flexibility is very different. One might
expect US unemployment to rise more dramatically than in Europe
during a recession and to have a larger gap between peak and trough. Taking the weighted average for the Eurozone this holds true with the US seeing a rise of 53% from peak employment to recessionary trough and the Eurozone seeing a more subdued 10% difference. However, this hides some unpleasant surprises. The Netherlands, Portugal and Luxembourg all have a higher differential in unemployment than the USA and Denmark is approaching the same levels. The economies differ in other crucial respects as well. It is difficult to isolate investment in technology from other investment at a whole-economy level. Taking total investment as a proxy, although unsatisfactory, gives a view of the scale of investment over the last five years. With the exception of Germany, the large European economies have more or less kept pace with the USA in terms of investment. The suspicion remains, however, that Europe is behind the USA in technology investment. Research for the Work Foundation* postulates that ICT may account for as much as half the growth in UK labour productivity over the last decade – but the impact on whole-economy growth has yet to be felt. This is partly a matter of timing. US productivity growth fell during the period of most intensive investment in ICT (1973-1990) but rose sharply through the 1990s. The research concludes that investment in ICT seems to be a slow-burn, at least at whole-economy level. Given that UK firms invested less, later than their US counterparts, the country is almost certainly experiencing a ‘productivity lag’. It is same to assume that this argument would apply equally to those EU economies that follow the northern European model. |
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| How does this impact upon property markets? Insofar
as employment is an expression of demand for space, an economy
growing at an annualized rate of 8.2% two years into a recovery
one might expect to see an impact upon vacancy rates, yet taking
the CBRE office vacancy rates for the top fifty US markets, these
show no sign of downward movement at all. In the industrial sector
too, vacancy rates remain stuck at 11-12% As just one example of what is happening - Dell Computer increased the capacity of one of its plants by 25% by redesigning its stock management and installing new software. That allowed it to expand output without taking additional space. This is being repeated across the USA. Will we see the same pattern emerging in Europe? Generally the effect is likely to be less marked in the short-term since, for the main European economies, job losses have not been on the same scale as in the US. In industries that have a high information or technology content we look particularly to follow the American pattern. This bodes ill for industries such as Financial Services and centres where they are concentrated. This includes many of the core office investment markets. As can be seen in the chart, centres such as Brussels, Amsterdam and Frankfurt look especially vulnerable to a delayed property market recovery. According to PriceWaterhouseCoopers barometer of confidence** taken in December, workforce expansion is planned by only 15 per cent of surveyed European executives, while 41 per cent expect to downsize staff. The rest foresee little or no change. This despite generally higher expectations of growth in the global and European economies. * Getting by, not getting on - Technology in UK workplaces, iSociety **Business barometer – PWC December 2003 |
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