Employment gains, productivity strains : sectoral shifts and new geography of growth in the euro area

Over the past five years, euro area growth has been marked by persistent headwinds, with average growth falling short of the 2016-2019 period. This muted growth dynamic calls for the need to examine country-level sectoral drivers to better understand the evolution of the region's potential growth. Our findings point to growth being increasingly reliant on employment gains, amid a pronounced slowdown in labour productivity - primarily within the industry sector. Since 2015, this decoupling between employment and labour productivity has become more evident, with employment gains The geography of growth has also shifted. Germany and France, once the engines of euro area growth, have lately seen more subdued economic performance. In contrast, countries sometimes referred to as the periphery - including Ireland, Cyprus, Portugal, Greece and Spain - have outperformed. This reversal between core and periphery is multifaceted, reflecting stronger labour market dynamics in the periphery, multinationals-driven growth in Ireland, a productivity decline in France, and subdued employment in Germany. Looking ahead, the euro area's growth prospects remain precarious. Adverse demographic trends are expected to significantly constrain employment growth. Without a broad-based recovery in labour productivity, potential growth could fall to just 0.5% by 2029 - well below current forecasts. These trends highlight the urgent need for coordinated policy action to support productivityenhancing reforms and secure sustainable long-term growth.