European Payrolls Shrink by Record as Economic Slump Deepens

By Emma Ross-Thomas

March 16 (Bloomberg) -- European payrolls contracted by the most on record in the fourth quarter as the global financial crisis forced companies to scale back production and cut jobs.

Employment in the euro region shrank 0.3 percent from the previous three months, the second straight contraction and the biggest decline since the data series started in 1995, the European Union statistics office in Luxembourg said today. Compared with the year-earlier period, payrolls stagnated in the fourth quarter, and full-year growth slowed to 0.8 percent from 1.8 percent in 2007. A separate report showed inflation held near the lowest in 10 years in February.

Companies from auto-parts maker Continental AG to oil company Total SA are laying off workers to weather the deepening global recession. With euro-area unemployment at a two-year high and inflation at a decade low, growing concerns about deflation are putting pressure on the European Central Bank to announce new measures to stimulate lending.

“We’re definitely going to see employment fall a lot further,” said Howard Archer, chief U.K. and European economist at IHS Global Insight in London. “It’s likely to bring inflation down further, or at least keep inflation limited,” he said, adding that employment may continue to decline “well into next year.”

With oil prices down by two-thirds since a July peak, consumer prices in the euro area rose 1.2 percent from a year earlier in February, holding near the lowest rate since 1999. Retail sales have declined for eight months and Carrefour SA, Europe’s largest retailer, said on March 12 that it would step up price cuts.

Global Economy

Goldman Sachs Group Inc. expects the euro-area economy to shrink by 3.6 percent this year and lowered its forecast for the global economy on March 13 to a 1 percent contraction. The World Bank has also said the world economy may contract this year for the first time since World War II.

Finance chiefs from the Group of 20 meeting in Britain over the weekend pledged a “sustained effort” to end the worldwide slump. As the credit freeze threatens to push the global economy deeper into its worst recession in six decades, the G-20 vowed to clean up the toxic assets that helped trigger the financial crisis and led banks to rack up more than $1 trillion in losses.

Hanover, Germany-based Continental, Europe’s second-biggest auto-parts manufacturer, said on March 11 that it plans to eliminate 1,900 jobs in the next 12 months. Paris-based Total, Europe’s third-largest oil company, plans to cut 555 positions at its refining and petrochemicals operations in France.

Rate Cut

The ECB has reduced its key interest rate by more than half since early October to a record low of 1.5 percent in its efforts to combat the worst global recession since World War II. The central bank expects inflation to average just 0.4 percent this year, and ECB President Jean-Claude Trichet said last week that deflationary risks were “negligible” even as he left the door open to another rate cut.

“Most analysts, including us, are thinking the ECB is underestimating the risk of deflation,” said Martin van Vliet, senior economist at ING Bank in Amsterdam. “There’s a risk that lower headline inflation, lower core inflation will start to impact on expectations of households and markets and that’s what the ECB is sort of in denial about.”

Data last week added to deflation concerns. European producer prices unexpectedly fell on an annual basis in January for the first time since 2004 as German wholesale prices declined the most in almost 22 years.

The statistics office estimates that the total number of people employed in the euro area was 145.4 million in the fourth quarter. The total in the 27-nation EU was 225.3 million.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net