Euro area: Labour demand is lagging decent growth

The Euro area economy has weathered the latest energy shock surprisingly well. Ex-Ireland GDP has continued to expand at around a 1%ar average pace, broadly in line with our estimate of potential and similar to the pace delivered over the past year. The labour market has weakened nonetheless. While the unemployment rate remains close to historical lows at 6.4%, our tracking points to close to zero employment growth in 3Q26, prompting us to lower our 2H26 forecast from 0.5%ar to 0.2%ar. Beneath the aggregate slowdown, a persistent two-speed labour market remains in place. Employment growth has remained relatively firm in the periphery, but employment has been contracting in the core, where Germany remains the main drag, while French labour demand has also softened. By 2Q26, annual employment growth remained robust at 1.4%oya in the periphery but had fallen to -0.2%oya in the core. Core job creation has been too weak to absorb even modest labour-force growth, pushing the unemployment rat