Eurozone jobless rate holds at 6.3% as ECB eyes 3% inflation

The eurozone unemployment rate held at 6.3% in April, defying expectations for a decline, as the European Central Bank raised its 2026 inflation forecast to 3% — a level that all but locks in a June rate increase.

"The labor market continues to show few signs of downside economic risk in the aggregate," said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

The number of unemployed people fell by 84,000 compared with March, Eurostat data showed Monday, though the jobless rate matched the prior month after March was revised up to 6.3% from 6.2%. Economists had forecast a dip to 6.2%. With the exception of a slight jump to 6.4% in February, the rate has held steady since January 2025, showing the labor market's resilience through a period of elevated geopolitical uncertainty.

The steady jobless rate gives the ECB room to prioritize inflation fighting over growth support when it meets in June. The central bank now sees inflation averaging 3% in 2026 — up from the 1.9% forecast before the Iran conflict sent energy prices surging — before easing to 2.3% in 2027. That compares with 2.1% in 2025 and remains well above the ECB's 2% target. The last time the ECB raised its inflation forecast by more than a full percentage point mid-year was in 2022, following Russia's invasion of Ukraine, when the projection jumped from 3.7% to 6.8% over three months.

Wage Pressures and the Inflation Outlook

The tight labor market supports wage demands as workers seek compensation for higher living costs, a key channel through which energy shocks feed into persistent inflation. The ECB's wage tracker indicated in early May that negotiated wage growth is likely to moderate over the course of 2026, but the central bank's own scenarios show the risk is skewed to the upside.

In an adverse scenario involving acute energy supply disruptions lasting through the current quarter, wage growth would reach 3.7% in the final three months of 2026 and peak at 4% in early 2027. A more severe scenario would push that to 4.6% in the fourth quarter and 5.8% next year — levels that would keep services inflation elevated well into 2027.

The data "gives the ECB scope to respond hawkishly to the jump in inflation following the US-Iran war despite a visible hit to economic activity," Vistesen said.

Manufacturing Shows Strain Under Cost Pressures

Separate data Monday painted a more fragile picture for the factory sector. The S&P Global eurozone manufacturing PMI was revised to 51.6 in May from a flash estimate of 51.4, but that was still down from 52.2 in April — the highest in 47 months. The output index fell to a four-month low of 51.3.

Manufacturers reported the sharpest increase in input costs since May 2022, with energy and raw material prices surging. Supply chain delays reached their highest since the pandemic-era squeeze of 2022, S&P Global said. The employment component of the PMI pointed to an acceleration in factory job losses, even as the headline index remained above the 50-point threshold separating growth from contraction for a fourth consecutive month.

"Although euro area manufacturers reported an expansion for a fourth successive month in May, the sector is showing signs of struggling under the weight of rising prices and supply disruptions emanating from the war in the Middle East," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

The divergence between a resilient services-driven labor market and a manufacturing sector under cost pressure will be a key variable for the ECB as it calibrates the pace of rate increases. The next ECB decision is scheduled for June 12, with markets pricing a quarter-point hike as the base case. The euro traded at $1.1648 Monday, down 0.3%, while the yield on the German 10-year Bund rose 4 basis points to 2.78% as traders adjusted for a more aggressive tightening path. Brent crude held above $93 a barrel, near its highest since the start of the Iran conflict, adding to the cost pressures facing manufacturers.

This article is for informational purposes only and does not constitute investment advice.