Investors are alarmed by plans by European firms to raise wages and give one-time incentives to employees to assist them to get through a harsh winter. They are worried that the additional costs would affect profitability and hurt the region’s economy.
Numerous businesses, including Stellantis and LVMH, are giving one-time incentives to the majority of their staff to help with rising food and utility costs throughout the winter.
Whereas those payouts are reasonably simple for large multinational corporations to absorb, it is more concerning that many are simultaneously moving through with yearly pay review conversations or have already agreed to unannounced compensation increases.
To represent euro zone inflation (EUHICY=ECI), which reached a record 10% in September, trade unions have also demanded for improved pay.
In negotiations that will begin this week, Italian unions that represent employees of Stellantis, Iveco (IVG.MI), CNH Industrial (CNHI.MI), and Ferrari, will demand a pay increase of more than 8% in 2023.
In response to union demands on Sunday, TotalEnergies (TTEF.PA) pledged to advance salary negotiations to resolve a strike that delayed supplies to roughly a third of French gas stations and forced the government to use strategic reserves.
Executives are already under pressure from rising energy, food, raw material, and credit prices. Additionally, supply systems are clogged, increasing transportation costs and prolonging the COVID-19 pandemic’s recovery.
Up until recently, many businesses that produce anything from automobiles to pet food products and ice cream have raised their prices to cover the increased expenses.
The second-largest fashion retailer in the world, H&M (HMB.ST), has issued a warning that demand is cooling, implying that customers are beginning to hesitate, raising concerns that businesses may find it difficult to maintain their current approach.
Analysts, investors, economists, and strategists sketched a bleak picture for the rest of 2022 in interviews and predicted even more difficulties for the following year.
Hani Redha, the manager of PineBridge Investments’ global multi-asset portfolio, predicts that Europe will enter a recession in the 4th quarter.
Because margins would no longer only be somewhat squeezed by rising wage pressure, this may result in a full-blown margin collapse.
The forthcoming third-quarter results season, according to Stephane Ekolo, global equities strategist at the Tradition in London, is likely to be highlighted by profit advisories or softer earnings, which would put pressure on stocks.
According to him, wage increases should hurt business profits because they will only serve to drive up inflation at a time when prices are also growing.
This year has seen a 20% decline in the main STOXX 600 index for Europe (.STOXX), putting it on pace to have its worst year since the 2008 global financial crisis.
Eurostat revealed costs for businesses in the euro zone increased 43.3% in the year leading up to August, more than doubling U.S. levels. Since the beginning of the year, estimates for profit margins have been reduced in about 50% of the region’s businesses, according to Bernstein.
Nevertheless, according to Refinitiv I/B/E/S statistics, companies featured on the STOXX 600 region-based index are anticipated to record an increase in earnings of roughly 32% in the third quarter, led by utilities and energy firms buoyed by surging oil and gas prices. Profit growth would be 11.8% absent energy.
That represents a modest increase over the second quarter and a sharp down from the staggering 60% growth seen during the same period last year, which was distorted by the surge in activity following the end of lockdowns.
Analysts argued that may be overly optimistic given the escalating challenges. Among the companies posting results the next week are Nestle (NESN.S) & Faurecia (EPED.PA).
The picture also gets worse after the quarter that ends in September. According to the Refinitiv data, profit growth is predicted to decline significantly to 19.5% in the 4th quarter and just 1.7% in the first.
According to the data, Europe Inc. will enter a recession in the q3 of 2023 with a profit decline of 3.8% after a 2.4% decline.