The acceleration of wage growth in the Eurozone’s biggest economy, Germany, is cautioning some economists ahead of the upcoming European Central Bank’s announced interest rate reduction next month.
Trade union think-tank WSI revealed data on Tuesday showing that agreed wage negotiations in Germany are set to surge 5.6% in 2024, based on agreements made from January to June 2024. This real pay rise will be the most rapid since the start of their records in 2000.
Though this sharp boost in wages significantly surpasses the 2% inflation goal set by rate regulators, Frankfurt policymakers are factoring in this robust pay increase into their projections. They maintain tranquility in the face of growing wage inflation, stemming from a perception that employees are currently recovering, having previously lost purchasing power to inflation. Despite considering this year’s 5.6% pay increase, only half of the purchasing capacity lost by German workers from 2021 to 2023 has been replenished.
ECB President Christine Lagarde, referring to a new 12% wage deal for Germany’s public sector workers—the first of its kind in three years—underscored its impact in June.
The market currently predicts over a 90% likelihood of another 25 basis point slash in September, following the deposit rate drop from 4% to 3.75% in June. Policymakers’ resolve is bolstered by the curbing of the so-called “greedflation” phenomenon, signalling that businesses are finding it increasingly challenging to transfer enhanced payroll expenses to their clients.
In the post-pandemic period, industry experts argue that companies capitalised on high operational costs and robust consumer demand to drive up prices, boosting their profit margins. However, with growth now seeming stagnant, these profits might be headed for a contraction, despite stable low levels of unemployment potentially enabling workers to demand wage hikes.
Notably, there is some disagreement amongst the monetary policy makers about the European Central Bank’s (ECB) ability to prevent what its President, Christine Lagarde, termed ‘reciprocal inflation’. Robert Holzmann, the hardline Austrian central bank governor and the only one to dissent against a rate cut in June, stated that rising Eurozone labour costs could disadvantage the region from a competitive perspective.
Holzmann suggested to the Financial Times that the potential competitive disadvantages should prompt salary negotiators to moderate their expectations, encouraging businesses to invest in productivity-boosting initiatives. In this landscape, he advised monetary policy makers to remain vigilant and take into account a wide range of data.
Commerzbank’s chief economist, Jörg Krämer, raised concerns about the central bank’s management of wage pressures, describing it as ‘risky’. He likened the current ‘catch-up’ phenomenon to the ‘second-round effect’ from earlier times. As such, it is anticipated that there will be more generous pay settlements in the forthcoming months.