European Middle Market Companies Face Surging Labour Cost Inflation

Labour cost inflation has reached historical highs in Europe, placing significant pressure on middle market companies in labour-intensive service industries. DBRS Morningstar observes that more than two-thirds of our rated European middle market issuers with a higher proportion of labour costs missed their EBITDA targets in 2022 as unexpected higher wages and related operating expenses dampened profit margins. Many of these issuers have initiated efficiency measures to restore profitability this year. However, amid weakening economic activity and persistent labour cost inflation, half of the companies included in the sample are already behind their budgets as of Q1 2023.

“Although we do not anticipate widespread negative rating actions in the upcoming months for European middle market labour-intensive issuers, we found the highest risk in a small number of rated healthcare service providers,” states Pablo Gonzalez Martinez, Assistant Vice President, Middle Markets. “These companies face sustained labour shortages and higher compensation costs, which are likely to drive disproportionate credit metric deterioration.”