WeWork's bankruptcy is the beginning of a broader collapse in zombie companies. WeWork's collapse is just the beginning: there's likely a wave of zombie bankruptcies that are about to hit the market, according to Wall Street veteran and investment research firm manager David Trainer. (Markets Insider)

What may be ahead for the 2024 economy. The 2023 economy has proved more resilient than most expected at the start of this year, but huge questions loom. (Axios)

Israel agrees to maintain daily pauses in fighting in northern Gaza, US says. Israel will implement four-hour pauses in fighting in parts of the northern Gaza Strip each day, White House National Security Council spokesperson John Kirby said on Thursday. (NBC News)

What to expect from Biden and Xi's upcoming meeting. President Biden and China's leader Xi Jinping expected meeting this week could help stabilize the relationship, but major obstacles stand in the way of true diplomatic breakthroughs. (Axios)

How artificial intelligence could upend global financial stability. Central bankers on both sides of the Atlantic are paying attention to the ways generative artificial intelligence may create hidden new risks to the global financial system. (Axios)

Panama Canal restrictions to stretch into 2024 as low water levels persist. The constraints have had a limited impact on cargo due to more blank sailings and earlier peak season activity, analysts say. (Supply Chain Dive)

US to fund $553m deep-sea terminal in Sri Lanka. Shipping container terminal in Port of Colombo announced as the US competes with China in international development financing. (Al Jazeera)

Bangladesh garment workers ‘frustrated’ by gov’t wage hike after protests. The minimum wage increase comes after weeks of the worst protests in a decade hit Bangladesh’s major industrial areas. (Al Jazeera)

Will UAE hurt Russia with export controls to please the US amid Israel war? Any export control measures by the UAE will be to shore up support from the U.S. in case the Israel-Gaza war expands. (Al Jazeera)

Gaza loses 61% of jobs in Israel-Hamas war, UN agency says. International Labor Organization says economic impact of the conflict will reverberate for ‘many years to come.’ (Al Jazeera)

Spain's Sánchez secures power deal with Catalan separatists prompting anger. Spain's Socialist acting prime minister, Pedro Sánchez, has agreed a controversial amnesty deal with a Catalan separatist party, bringing him closer to four more years in office. (BBC)

A turning point in Myanmar as army suffers big losses. The military-installed president of Myanmar has warned that the country is in danger of breaking apart if the government cannot control fighting which has broken out in Shan State. (BBC)

US and South Korea close ranks on common global issues during Blinken visit. The United States and South Korea closed ranks behind common approaches to North Korea, Russia and China on Thursday, vowing to continue to support Ukraine against Russia’s invasion and boosting humanitarian aid to Palestinian civilians in Gaza caught in Israel’s war against Hamas. (AP)

US applications for jobless benefits inch down, remain at historically healthy levels. Slightly fewer Americans applied for jobless claims last week, further indicating that the labor market remains strong in an era of high interest rates. (AP)

Europe’s Wage Rises Are Aiding Recovery but Economies Face Risks

Chikako Baba, Ben Park, Ippei Shibata, Sebastian Weber, IMF Blog

Europe’s economic recovery is getting a much-needed boost from rising wages and higher incomes. But in countries where population aging is shrinking the workforce, policymakers may soon face new challenges. Short-term wage pressures could combine with longer-term tightness in labor markets to stoke inflationary pressures.

After two years of falling purchasing power, it’s not surprising that Europe’s workers are pushing for more pay. Nominal wages rose by 4.5% in the euro area and more than 10% in other parts of Europe in the first half of this year. Higher wages help alleviate cost-of-living pressures and support economic expansion.

But improved productivity, coupled with tight macroeconomic policies which limit companies from passing on higher costs to consumers, are essential if economies are to afford much higher wages without fanning inflation, as discussed in our latest Regional Economic Outlook.

Wage growth has differed across countries. Across much of Europe’s advanced economies, wages have further to rise before they catch up with prices, meaning that pressure for pay rises is likely to persist. In Central, Eastern and Southeastern Europe, wage growth has been more rapid and kept up with prices. This region has seen high wage growth in the past, but back then productivity growth was strong as well. Today it is weak. That means further high pay rises would chip away at competitiveness.

Wage pressures are unlikely to subside any time soon. As the Chart of the Week shows, longer-term trends are already squeezing labor supply (total hours worked). Demographics and shorter working weeks mean employers face fierce competition to find qualified workers and must pay more to retain them.

Over the past decade, Europe’s labor force participation grew relatively rapidly. Even if this trend continues, the labor supply could decline by 0.1% annually over the next five years as the population ages, population growth slows, and the shortening of working weeks continues. By contrast, the US labor supply is expected to grow by 0.2% as immigration and longer working hours more than compensate for a deterioration in demographics.

The scope to offset these labor market trends in Europe is limited. Proposals to increase retirement ages further may run into political opposition. There is also little scope to increase average working hours because shorter work weeks are gaining popularity.

What must policymakers do? There is a fine line between aiding economic recovery and banishing stubbornly high inflation. Central banks must watch for upside risks to inflation and closely monitor wage settlements and their consistency with productivity trends. A marked divergence would be worrisome. The mix of monetary and fiscal policy should remain appropriately tight to bring inflation back to target.

At the same time, structural reforms to increase productivity are becoming critical. Doing so would both lower inflationary labor-market pressures and raise longer-term economic growth potential. Boosting the labor supply by allowing workers to work more hours, making it simpler to transition between jobs, equipping new generations for future jobs, reskilling workers, and facilitating the integration of migrant workers all have an important role to play.

This article originally appeared on IMF Blog.

 

Week in Review Editorial Team:

Annacaroline Caruso, editor in chief

Jamilex Gotay, editorial associate

Kendall Payton, editorial associate