Europe Inc’s wage hikes are alarming investors as recession worries mount

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Wage increases increase cost pressure companies

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Investors believe that earnings expectations are too positive

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Q3

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STOXX 600 faces worst year since 2008, down 20% this year

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Europa Inc sees recession in Q3 2023

LONDON, Oct 10 (Reuters) – Plans by European companies to raise wages and pay one-off bonuses to help staff through a tough winter are raising concerns among investors who fear the extra costs could hurt profits and undermine the region’s economy.

Stellantis and LVMH are among a number of companies awarding one-off bonuses to most employees to help pay rising food and energy bills during the winter.

While these payouts are relatively easy for large multinationals to digest, a bigger concern is that many companies are also speeding up negotiations for annual pay reviews or agreeing to unplanned pay increases.

Most UK grocers have raised hourly wages twice this year, Carrefour has offered a pay rise and a lump sum, and Stellantis will start wage negotiations in France in December instead of early next year.

Unions have also called for better wages to reflect eurozone inflation, which hit a record 10% in September. Italian unions representing workers at Stellantis, Ferrari, Iveco and CNH Industrial will demand a pay rise of more than 8% by 2023 in talks that begin this week.

On Sundays, TotalEnergies

offered to

in response to union demands to end a strike that has disrupted supplies to nearly a third of French gas stations and prompted the government to use strategic reserves.

That puts pressure on managers already battling rising energy, food, commodity and credit costs and disrupted supply chains that have pushed up shipping costs and slowed the recovery from the COVID-19 pandemic.

Until now, many companies that make everything from cars to pet food and ice cream have passed on the extra costs in the form of price increases.

A warning by the world’s biggest fashion retailer H&M that demand is falling indicates that shoppers and consumers are beginning to pull back, raising fears that companies will struggle to continue that strategy.

In interviews, investors, analysts and strategists painted a gloomy picture for the rest of 2022 and suggest even greater challenges for next year.

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

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

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

“Wage increases will only continue to fuel inflation and should hurt corporate margins as they face rising costs at the same time,” he said.

Europe’s STOXX 600 index is down about 20% this year, on track for its worst performance since the 2008 global financial crisis.

TOO OPTIMISTIC

Eurozone business costs rose 43.3% in the year to August, more than double the US level, according to Eurostat. According to Bernstein, about half of the region’s industries have cut earnings expectations since the start of the year.

Despite this, companies in the regional STOXX 600 index are expected to report a profit rise of about 32% in the third quarter, mainly due to utilities and energy companies boosted by rising oil and gas prices, according to data from Refinitiv I/B/E /S. Excluding energy, earnings growth would be 11.8%.

That’s slightly more than in the second quarter and less than the huge 60% growth in the same period last year, which was affected by the recovery in activity after the end of lockdowns.

Given the mounting headwinds, that may be too optimistic, analysts say. Nestle and Faurecia are among the companies to publish results next week.

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

Europe Inc will enter recession in the third quarter of 2023, with profits falling 3.8%, after a 4.4% drop in the second quarter, the data said.

DOUBLE BUY

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

Katharina Koenz, senior economist at Oxford Economics, estimates that average annual negotiated wages will rise by 4-5% next year, up from 2008 levels, when there was a wave of big wage increases amid the global economic crisis.

Increases below inflation would hurt households even more and likely cause consumer demand to fall even faster.

However, Florian Ielpo, asset manager at Lombard Odier Investment Managers, believes that the market has not yet paid enough attention to the double drag of rising inflation, including wages, and declining demand.

“Equities currently don’t factor in the risk of a decline in earnings… The only thing being discounted is high interest rates, not waning demand.”

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