Burst housing bubble dents growth

Property values are a better indicator of economic health than high-profile job cuts, writes Lorraine Mallinder.

The decisions by Nokia, the mobile phone manufacturer, to lay off factory workers in Germany's North Rhine-Westphalia, and by steelmaker ArcelorMittal to shut down a plant in Lorraine, eastern France, have caused soul-searching about the future of manufacturing in western Europe.

But a switch of jobs from west to east is not necessarily a reliable guide to the health of the European economy. Real estate, says Nicolas VŽron, a research fellow at Bruegel, a Brussels-based think-tank , is a better guide as to where the wind is blowing.

"Irrespective of what is happening in the US, we know from past experience that one of the big triggers of economic and financial turmoil in developed countries is real estate bubbles," he says. "From that point of view, there's a concern that some parts of Europe are more at risk than others."

EU member states such as Spain and the UK, whose property markets have been on the boil for years, are at particular risk. Spain is especially advanced, with the housing slowdown and the credit crunch expected to make a real dent in growth figures for the first quarter of 2008.

Spain, the fourth-largest economy in the eurozone, has enjoyed non-stop growth for 15 years, thanks to its booming construction sector, but with house prices now on the slide, the party appears to be over. Ahead of elections on 9 March, the Socialist government is sticking to its earlier growth estimates for 2008 of more than 3%, but private banks foretell figures closer to 2%.

The UK is in a worse position still, thinks VŽron. The property market is ripe for a sharp correction. The combination of bloated prices and tighter lending practices has heightened fears of a downturn. Since it is outside the eurozone, the UK is exposed to greater risk of currency exchange crises.

Industrial troubles in France and Germany, for their part, do not in themselves indicate an economic winter. Nokia and ArcelorMittal are both in rude financial health - the plant closures are part of their individual restructuring plans.

But even if the EU economy can escape a recession, it may lack the skills to fulfil its economic potential.

A study, "Future skill needs in Europe", published this week (18 February) by the European Centre for the Development of Vocational Training (Cedefop), an agency of the European Commission, included a forecast of skill needs covering the next seven years, pinpointing sectors such as nanotechnology, agri-food and health as growth areas. The study confirms a growing shift to the services sector and suggests that the painful transition of European economies away from the primary and manufacturing sectors is still not complete.

Cedefop predicts that the EU economy as a whole will generate more than 13 million new jobs by 2015, despite the loss of more than 2m jobs in the primary sector - agriculture, fisheries and mining - and 500,000 in manufacturing. An estimated 3.5m additional jobs will be created in transport and tourism. Business and various other sectors will generate 9m new jobs, while an additional 3m jobs will be created in education, health and social work. The Nokia and ArcelorMittal job losses in Germany and France do not in themselves herald economic recession. But they are another indication that the EU needs a workforce that can be retrained, reskilled and redeployed.

"There is evidence to suggest that Europe is failing to keep up with the demand for skills driven by the knowledge economy," says Soumitra Dutta, a professor in business and technology dean at INSEAD, the business school. According to Dutta, the number of people needed to fill the advanced technology skills gap will grow to 500,000 this year, from 160,000 in 2005. As a percentage of total demand, the skills gap will this year reach 15.8%, from 8.1% in 2005.

Property values are a better indicator of economic health than high-profile job cuts, writes Lorraine Mallinder.