Insufficient demand is limiting a smaller share of European Union businesses than the historical average, while labour shortages remain unusually persistent, according to a new European Commission analysis.
The combination matters for businesses deciding whether their next investment should attract customers, expand production or improve recruitment. Those responses address different problems, even when each appears in company accounts as disappointing sales.
The Commission’s third-quarter European Business Cycle Indicators report, published on 21 October, puts the weighted share reporting insufficient demand at 29.2%. Its average since the third quarter of 2003 is 32.8%.
Reported labour shortages have declined from their third-quarter 2022 peak but remain above their long-term average. Financial constraints have been broadly stable for three years, close to their historical average of 10%.
What the indicators measure
The analysis combines surveys of industry, services and construction, weighted by their gross value added, a measure of their contribution to economic output. Services receive a 65% weight, industry 26% and construction 9%.
It is not a census of every business or a measure covering every economic sector. Firms can report more than one obstacle, so the shares should not be added together as mutually exclusive categories.
The indicators describe reported constraints. They neither prove what caused an individual company’s difficulties nor provide a precise forecast of future GDP growth.
A separate European Central Bank survey released on 26 October reinforces the importance of distinguishing different business pressures.
Production and labour costs were major concerns for 63% of firms, while 61% cited the availability of skilled labour. Finding customers concerned 52%, and access to finance 26%. A major concern meant a score of at least seven on a scale of one to ten.
The ECB surveyed 12,822 euro area enterprises between 26 August and 2 October. Most were small or medium-sized businesses. The euro area comprises countries using the euro and is smaller than the EU.
Its questions and coverage differ from the Commission indicators, so 61% concerned about skills cannot be compared directly with 29.2% reporting insufficient demand. The ECB also cautions that substantial changes in its sample make numerical expectations difficult to interpret.
Fewer vacancies can coexist with skills shortages
Eurostat’s second-quarter figures put the EU job vacancy rate at 2.0%, down from 2.1% a year earlier. The rate measures unfilled positions as a share of occupied and vacant posts combined.
A lower aggregate vacancy rate need not mean every employer can recruit the people it needs. A hypothetical manufacturer might receive fewer orders overall while still lacking a technician required to operate a particular machine. Recruiting more general staff would not necessarily remove that obstacle.
Likewise, an employer’s difficulty filling a position could involve pay, location, hours, training requirements or a mismatch between applicants’ capabilities and the role. An economy-wide percentage cannot identify which explanation applies to that employer.
Our reporting on how companies organise employee training examines a related operational issue: developing skills requires opportunities and systems that let employees use them.
Diagnose the constraint before committing money
For a business, distinguishing weak demand from limited capacity begins with its own evidence. Enquiries, quotations converted into orders, cancellations, delivery delays and unfilled skilled roles reveal different parts of the problem.
If orders are scarce and equipment is idle, additional production capacity may have little immediate value. If orders are waiting because a specialist process cannot run, more advertising could increase the backlog without improving deliveries.
Costs complicate the picture further. In a July analysis of inflation pressures, ECB economists distinguished demand-driven price increases from supply shocks such as more expensive energy. The source, size and persistence of a shock affect its economic consequences.
A company can therefore face weak customer demand and higher costs simultaneously. Raising prices to protect margins may affect sales; maintaining prices may squeeze the money available for wages or investment.
As our earlier examination of consumer confidence and sales forecasting explains, broad sentiment measures are useful context, but they cannot replace evidence about a firm’s own customers.
The new surveys offer a reason to examine both sides of that decision. A business may need more orders, more capacity, or a particular skill. Establishing which one is holding it back helps determine whether its next pound or euro is best spent on selling, equipment or people.
