Despite all the doubts about world trade, debt and inflation, worker shortages may be the economic trendsetter this year – in both countries.
Immigration restrictions and deportations are at the top of the agenda of President-elect Donald Trump, who returned to the White House on Monday. If he carries out this plan, as many as 1 million illegal migrants could be deported in the next two years and US population growth could slow as a result.
Meanwhile, in Europe, there is growing speculation that a long-term ceasefire between Ukraine and Russia could cause many of the refugees and migrants currently scattered across Europe to start returning home.
More than 4.3 million Ukrainians have left the country since Russia’s invasion in 2022, and more than 1 million have settled in Germany alone. Many Ukrainians were given the legal right to live and work in Europe under a 2022 European Union directive. The prospect of losing at least some of these workers has raised concerns in several central European countries.
The current significant decline in the number of workers – when labor markets in many countries remain hot despite severe spikes in lending rates over the past two years – is resurrecting concerns that some countries are potentially facing supply stagflation.
The prospect of a new rise in wage inflation is just one more headache for a central bank that appears keen to roll back rate hikes in 2022 and 2023.
This line graph shows how mass deportations in the US will impact US inflation and real GDP growth through 2035
Thomson ReutersImpact of deportation of 1.3 million undocumented immigrants from the US (% deviation from baseline)
HOT LABOR MARKET
The International Labor Organization, a UN agency, said on Thursday that the global unemployment rate remained at a historic low of 5% last year. It is expected that interest rates will remain the same in 2025, and fall further to 4.9% next year.
And charting long-term aging and fertility trends to illustrate how reduced labor supply is impacting them, JP Morgan strategists note that the developed world’s overall working-age population appears to have peaked at 746 million in 2023 and is projected to fall by 746 million people. 47 million by 2050 based on UN estimates.
This will be the start of a year where the business world in the US and Europe will experience the same labor market concerns that have arisen in the wake of this pandemic.
It’s true, the heat in the US labor market doesn’t appear to have abated much in the last year.
Although overall labor hiring difficulties appear to have returned to pre-pandemic levels, surveys of U.S. small businesses continue to show severe worker shortages in key sectors such as transportation, construction and manufacturing.
With one-fifth of small companies planning to accept hires in the next three months, nearly 90% of companies looking to hire reported no or only a few qualified applicants. And the number of companies who say labor costs are their biggest problem is only 2 percentage points below the extreme figure in 2021.
This then puts the spotlight back on Trump’s proposals regarding migration restrictions and deportation plans. About 8.3 million US workers are expected to become illegal migrants by 2022.
Immigrants in the US — A stacked bar showing how many immigrants without legal status in the US have lived in the country for some time.
MACRO DRIVER
Migration has been an important macro driver over the past two years and is likely a key reason why the US economy has been able to continue creating large numbers of jobs without causing a spike in inflation.
The US Congressional Budget Office in February sharply increased its estimate of net immigration through 2023, forcing economists to rethink their expectations for continued wage growth in 2024.
However, migration numbers have declined significantly since then, in part due to President Joe Biden’s administration’s mid-year asylum ban which is estimated to have reduced monthly net migration by a third compared to 2023.
Trump’s deportation proposals could tighten things up, and investors are therefore starting to see Trump’s migration agenda as potentially more important economically than his tax or tariff promises.
Morgan Stanley estimates Trump’s plan could result in the deportation of about 1 million migrants in one to two years, and a drop in population growth from 1.2% in 2024 to 1.0% or less this year.
Schroders economists argue “a greater threat to inflation may come from a crackdown on immigration, as well as mass deportations, if this causes labor shortages that will ultimately result in rising wages and service inflation.”
Schroders’ team cited the Peterson Institute’s estimate that mass deportations could add 3 percentage points to inflation compared with a one-point increase from a 10% tariff increase. They estimate supply shocks could reduce potential GDP growth to 1.5% from more than 2% currently.
And Invesco argues that if deportations negatively impact growth and create an environment of stagflation, then a “significant stock market decline” will occur.
There are many details about this debate – including whether deportations will be offset by work visas for skilled migrants –.
But migration and fears of a shrinking workforce are clearly the key macro investment variables that will likely dominate market thinking ahead of Trump’s inauguration next week.
Source: Reuters
