Euro zone unemployment falls to lowest level in almost 5 years

The euro zone's unemployment rate fell further in May but the U.K.'s vote to leave the European Union (EU) and the knock-on effect it could have on demand, could upset the recovery.

Unemployment in the euro zone stood at 10.1 percent in May, according to the latest figures from Eurostat, the statistical office of the European Union, down from 10.2 percent in April.

The unemployment level in the 19-country single currency area was the lowest since July 2011, Eurostat said.

It estimated that 21.084 million men and women in the 28-country EU, of whom 16.2 million were in the euro area, were unemployed in May 2016.

The data came shortly after a survey showed that euro zone manufacturing growth was at a six-month high in June. Markit's final purchasing managers' index (PMI) rose to 52.8 last month, above a preliminary figure of 52.6) as "growth of both production and new orders accelerated to the fastest in the year so far," Markit said in a data release.

While the latest data shows that momentum in euro zone job growth and manufacturing activity is moving in the right direction, the British referendum last week on EU membership could damage the nascent recovery.

Employees work on an industrial French macarons' assembly line.
Employees work on an industrial French macarons' assembly line.

Although the U.K. is not a part of the euro zone, industries in those countries largely rely on exports, not least of all to the British market.

Howard Archer, chief U.K. and European economist at IHS Global Insight said in a note on Friday that "a major question going forward is to what extent will heightened uncertainty and potentially slower growth resulting from the Brexit vote lead to euro zone companies adopting a more cautious approach in employment?"

He noted, however, that the "decent drop" in unemployment supported hopes that consumer spending could hold up in the coming months to help limit the potential hit to euro zone growth posed by the U.K. vote to leave the EU.

The Data

The unemployment figures showed no change in a long-running trend among member states with the lowest unemployment rates seen in the Czech Republic (4 percent), Malta (4.1 percent) and Germany (4.2 percent) and the highest figures in euro zone members Spain and Greece, at 19.8 percent and 24.1 percent respectively.

Austria was the only EU country to register a rise in unemployment, the data showed.

The figure comes after another modest bit of good news for the euro zone. Preliminary data on Thursday showed that the euro zone returned to inflation in June, albeit rising to a modest 0.1 percent rate year-on-year last month, up from -0.1 percent in May.

The rate was above the average expectation of economists polled by Reuters of a zero reading for June, however, analysts were quick to caution that the rate had been helped by a slowdown in the drop in energy prices rather than pick-up in demand.

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