Wages in the euro zone’s largest economy are rising at their fastest rate this century, fuelling disquiet among some economists about next month’s expected interest rate cut from the European Central Bank.
Negotiated wages in Germany are expected to shoot up by 5.6 per cent in 2024, based on deals agreed between January and June, according to data published on Tuesday by WSI, a trade union think-tank. The pay increase, in real terms, will be the fastest since their records began in 2000.
Although the hikes are far in excess of rate-setters’ overall 2 per cent inflation goal, policymakers in Frankfurt have baked “elevated” pay growth into their forecasts.
The ECB’s calm in the face of higher pay pressure comes from a belief that workers are still “catching up” after their purchasing power was eroded by inflation. Even with this year’s 5.6 per cent pay rise factored in, only half of German workers’ losses between 2021 and 2023 have been compensated.
ECB president Christine Lagarde in June cited a 12 per cent wage deal for public sector workers in Germany – the first in three years – as an example.
“You can imagine that an agreement that is cut in 2024 and that covers [lost purchasing power in] 2021, 2022 and 2023 is obviously going to be very sizeable,” she said.
Markets are pricing in a more than 90 per cent chance of another 25 basis point cut in September, following June’s reduction in the deposit rate from 4 per cent to 3.75 per cent.
Policymakers’ confidence is shored up by the reversal of a phenomenon dubbed “greedflation”, which means it is harder for companies to pass on extra payroll costs to their customers.
Rate-setters believe businesses used the combination of high input costs and strong consumer demand to raise prices and boost profit margins in the immediate aftermath of the pandemic. Now, with growth stagnant, profit margins look set to shrink. Unemployment, meanwhile, remains low, meaning workers can push for wage increases.
However, not all rate-setters are convinced that the ECB will manage to avoid what Lagarde has referred to as “tit-for-tat inflation”.
Robert Holzmann, the hawkish Austrian central bank governor who was the sole member of the rate-setting governing council to not support a cut in June, said the rise in euro zone labour costs would weigh on the region’s competitiveness.
“The potential loss of competitiveness should encourage wage negotiators to moderate their demands, and the corporate sector to invest in productivity increasing ventures,” he told the Financial Times. “Against this background, monetary policymakers are well advised to look at a very broad set of data and to remain extremely vigilant.”
Jörg Krämer, chief economist at Commerzbank, said the central bank’s handling of wage pressures was “dangerous”.
“What is called catch-up now was called a second-round effect in the old days,” he said.
More bumper pay deals are expected in the coming months. – Copyright The Financial Times
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