Eurozone unemployment hit a fresh record low, while output from German factories rose in November, boosting hopes of a milder-than-feared economic downturn across the single currency area.

Figures from Eurostat, the European Commission’s statistics bureau, showed that the number of people in the labour market without work fell slightly in November. Eurostat reported 10.849mn workers without jobs, 2,000 less than in the previous month and the lowest since records began. The unemployment rate remained unchanged from October at 6.5 per cent.

Meanwhile, the German federal statistics office reported industrial production increased 0.2 per cent between October and November, a slightly better reading than the 0.1 per cent expansion forecast by economists polled by Reuters.

Franziska Palmas, senior Europe economist at Capital Economics, a research firm, said the rise confirmed the German manufacturing powerhouse held “held up better than expected” during the final quarter of 2022.

The German statistics office is set to publish on Friday its first estimate for GDP for last year, which economists expect to show the economy shrank by a modest amount over the final three months of 2022.

A surge in energy prices last spring following Russia’s invasion of Ukraine triggered concerns of power shortages and a deep recession in the eurozone. However, economists have steadily upgraded their estimates for growth over recent months on the back of better-than-expected incoming data and declining wholesale gas prices.

Investor morale over the eurozone economy has also improved. The Sentix index of market sentiment, also published on Monday, showed the third consecutive increase in January to its highest level since June 2022. “Investors are hoping for a mild recession,” said Sentix managing director Patrick Hussy.

The resilience of the eurozone economy and its labour market are expected to lead to more policy rate increases by the European Central Bank.

With unemployment stuck at historically low levels, “the ECB’s hawkish tone will likely double down on more tightening in the coming months,” said Paolo Grignani, economist at Oxford Economics.

Markets are pricing in a 50 basis point increase in interest rates when the ECB meets on February 2. That would be on top of the 2.5 percentage points’-worth of rises since June last year, which took the benchmark deposit rate to 2 per cent in December.

A tight labour market could boost wage growth and keep underlying inflation higher for longer. While headline inflation dropped to single digits in December, coming in at 9.2 per cent, core inflation — which excludes changes in food and energy costs and is seen as a better measure of longer-term price pressures — edged up from 5 per cent to 5.2 per cent.

The strength of the labour market “makes it a key risk for second-round inflation effects for the ECB,” noted Bert Colijn, senior economist, eurozone at ING. With a labour market this tight, “it is unlikely that unemployment will run up enough to make labour shortages a thing of the past,” Colijn added.

Between October and November, the unemployment rate dropped in Italy, France and Spain by 0.1 percentage point to 7.8 per cent, 7 per cent and 12.4 per cent respectively. It remained at 3 per cent in Germany.

Melanie Debono, senior Europe economist at Pantheon Macroeconomics, said that fiscal support across the eurozone should prevent “a significant increase in unemployment,” despite the economic downturn.