With job cuts mounting and costly furlough programs that can't last forever, Europe is at risk of a devastating increase in unemployment that won't be easy to reverse.
Economies across the continent are recovering and company sentiment is brightening, but it's a different story when it comes to hiring. After months of crisis, the outlook remains too uncertain for firms to commit to spending. Many may not even reinstate all furloughed workers when governments end subsidies that kept millions on payrolls.
All that raises the prospect of a job-poor -- or even jobless -- recovery, where unemployment stays high for a prolonged period even as growth appears to pick up. That could threaten consumer demand, hitting retailers, restaurants and bars that are already struggling, and feeding a damaging loop through the economy.
"The initial phase of the recovery will be jobless, and that's very typical for a European recovery," said Nick Kounis, an economist at ABN Amro. "A lot of the job losses are still ahead of us."
The potentially bleak employment outlook for Europe underscores how even a combination of policies that generally set the continent apart both in halting the spread of the coronavirus and mitigating its economic fallout can't ultimately completely protect labor markets.
In the euro area, unemployment could hit almost 10% by the end of the year as the economy slumps, according to a Bloomberg survey. A rebound in growth in 2021 won't be enough to reverse the damage. UK joblessness is forecast to reach 8%, more than double its tally earlier this year.
Furlough schemes to subsidize payrolls in the euro zone's four biggest economies supported 26 million people at their peak, according to Bloomberg Economics. But even with such huge programs, the fallout on jobs is spreading. In recent weeks, Airbus SE, Commerzbank AG and Sanofi were among major companies to signal staff cuts.
Europe's Mounting Toll
Selected job-cut announcements
• Air France-KLM: 7,500 posts at French arm
• Airbus SE: at least 15,000 jobs
• Commerzbank AG: more than 7,000 staff cuts considered
• Fraport AG: as many as 4,000 posts
• Heidelberger Druckmaschinen AG: about 1,600 jobs
• John Lewis Partnership Plc: as many as 1,300 jobs
• Rolls Royce Plc: 9,000 positions globally including 3,000 in UK
• Sanofi: 1,700 jobs in Europe
The situation could deteriorate further once furloughs are wound down. If business hasn't recovered enough when that happens, dole lines will grow.
"The worst of the impact on labour markets may be yet to come," European Central Bank Executive Board member Fabio Panetta said this month. "Some workers on short-time work schemes and temporary lay-offs may not be able to return to their jobs, and hiring looks likely to stay subdued."
At Bank of America, analysts point to the European Commission's monthly confidence data, where the jobs outlook in key economies is lagging that for industrial output.
"If production expectations improve more than employment expectations, the recovery may be job-poor, with implications for the labor market and household consumption," economists including Ruben Segura-Cayuela and Evelyn Herrmann said in a report.
That prospect is already troubling consumers. An Ipsos Mori poll covering 27 countries showed their second-biggest worry after the coronavirus was unemployment. In France, Italy and Spain, it's the top concern, more even than the virus that killed almost 100,000 in those three nations.
Policy makers are acknowledging the dangers, highlighting issues such as scarring in the labor market as millions lose work.
"Layoffs in the wake of bankruptcies are likely to leave many jobseekers struggling to retain their skills and attachment to the labor market," the European Commission warned on July 7.
What Bloomberg's Economists Say...
"If the furloughed become jobless, generous social safety nets mean the immediate impact on incomes would be limited. But, with millions more out of work, a model of saving behavior suggests nervous consumers would cut back on spending, deepening the downturn."
The Bank of England also sees a threat of higher and more persistent unemployment. When its chief economist, Andy Haldane, offered a relatively optimistic take on the economy last month, it was tempered by labor-market worries.
"Of these risks, the most important to avoid is a repeat of the high and long-duration unemployment rates of the 1980s, especially among young people," he said.
Governments are desperate to get ahead of the problem. UK Chancellor of the Exchequer Rishi Sunak announced a new program to protect jobs this month to counter what he described as "the most urgent challenge" of unemployment. That announcement came two days after an Opinium survey showed almost half of businesses expect to cut staff when Britain's furlough program ends in October.
German politicians are currently discussing an extension of their own program, while France has created a furlough mechanism that could last up to two years for companies that strike deals with unions on reduced working time in exchange for job guarantees. The French government has also pledged an annual incentive of as much as 4,000 euros ($4,566) for hiring young people.
The costs of such measures are too high for politicians to make them permanent, even if central bank bond-buying stimulus has bought them room for maneuver by containing yields for now. Analysts also wonder if even all that support will be enough to mitigate permanent economic damage.
"For some industries, you can see structural changes which may mean that some jobs might not come back," ABN's Kounis said. "The people who are sometimes laid off in an industry that is downsizing don't have the right skillsets straight away to fit into industries that are moving forward."
Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.