Plans by European companies to hike wages and pay one-off bonuses to help staff cope with a torrid winter are raising alarm among investors concerned that the extra cost could hurt profits and undermine the region's economy.
Stellantis and LVMH are among a slew of companies offering one-off bonuses to most employees to help with surging food and energy bills over the winter.
While those payouts are relatively easy for big multinational companies to digest, a bigger worry is that many are also bringing forward negotiations for annual pay reviews or have agreed unscheduled wage hikes.
Most British food retailers have raised hourly rates twice this year, Carrefour has offered a pay hike and a one-off payment and Stellantis will start salary negotiations in France in December instead of early next year.
Trade unions have called for better pay too to reflect euro zone inflation (EUHICY=ECI) which hit a record 10% in September. Italian unions representing workers at Stellantis, Ferrari, Iveco (IVG.MI) and CNH Industrial (CNHI.MI) will ask for a wage increase of over 8% in 2023 in talks starting this week. On Sunday, TotalEnergies (TTEF.PA) offered to bring forward wage talks, in response to union demands, as it sought to end a strike that has disrupted supplies to almost a third of French petrol stations and led the government to tap strategic reserves.
That's piling pressure on executives already battling soaring costs of energy, food, raw materials and credit and snarled supply chains which have boosted shipping costs, delaying the recovery from the COVID-19 pandemic. Until now, many companies making everything from cars to pet food and ice cream have passed on the extra costs through price hikes.
A warning from the world's No.2 fashion retailer H&M (HMb.ST) that demand is softening suggests shoppers and consumers are starting to baulk, sparking worries that companies may struggle to continue that strategy.
In interviews, investors, analysts and strategists painted a gloomy picture for the remainder of 2022 and suggest even greater challenges next year.
Hani Redha, global multi-asset portfolio manager at PineBridge Investments, expects Europe to sink into recession in the fourth quarter.
"That can lead to full-blown margin collapse, because then we're not just talking about rising wage pressure squeezing margins a little bit."
Stephane Ekolo, global equity strategist at Tradition in London, said he expects the upcoming third-quarter earnings season to be marked by profit warnings or weaker-than-expected earnings, pressuring stocks.
"Wage hikes will only continue to fuel inflation and should be detrimental to companies' margins as they continue to face rising costs at the same time," he said.
Europe's main STOXX 600 index (.STOXX) has fallen about 20% this year, on track for its worst performance since the global financial crisis in 2008.
