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Wages in the euro zone are rising at the fastest rate since the 1990s, data released by the European Central Bank shows, potentially complicating policymakers’ plans for further interest rate cuts.
The European Central Bank said on Wednesday that negotiated wages rose 5.4% year-on-year in the three months to September, outpacing the 3.5% annual rise in the previous quarter. This was the largest increase since 1993, six years before the euro was established.
The growth in wage agreements has been closely watched by monetary policymakers as a sign of sustained inflationary pressures. The ECB had expected negotiated wage growth to accelerate in the second half of the year, mainly due to a one-off deal in Germany, the EU’s biggest economy.
However, as price pressures ease, we expect bargained wage growth, which excludes bonuses, overtime and other forms of compensation, to decline sharply to a level consistent with the medium-term inflation target of 2% in the second half of 2025. There is. The labor market weakens.
As a result, the ECB is likely to “scrutinize” the positive wage data, said Andrzej Szczepaniak, an economist at financial firm Nomura. “As a result, consumer inflation pressures will further weaken in the coming months,” he said, pointing to survey data showing that corporate pricing power weakened in the fourth quarter.
The ECB has cut interest rates three times this year, bringing borrowing costs to 3.25%, and will cut rates by another quarter of a percentage point at its next meeting on December 12 amid signs of slowing inflation and stagnant demand. It is widely expected that
Elias Hilmar, an economist at Capital Economics, said wage growth is a lagging indicator of inflationary pressures because it includes all agreements currently in place, regardless of when they were signed. “That means we won’t reach a turning point as quickly as the indicators indicate.” Applies only to newly agreed wages. ”
More timely indicators, such as the vacancy salary tracker compiled by recruitment portal Indeed in collaboration with the Central Bank of Ireland, have been on the decline since mid-2022.
Germany’s largest industry union, IG Metall, recently struck a deal to secure a 5.5% wage increase over 25 months, which was significantly lower than the previous 8.5% increase.
Philip Lane, the ECB’s chief economist, said in the summer that he expects wage growth to slow sharply in 2025 and 2026 as the “catch-up” in salaries reaches a “peak”.
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The euro zone’s annual inflation rate rose to 2% in October from 1.7% the previous month. But concerns about flattening economic growth are more pressing than concerns about inflation. Germany is facing its first two-year recession since the early 2000s.
Earlier this week, the European Commission cut its growth forecast for the eurozone, warning that the 20-nation bloc will fall further behind the United States.
Unemployment in the euro area remains at a record low of 6.3%, but the number of job openings is falling and fewer companies are reporting labor shortages, making the labor market less tight. It shows.
“Eurozone labor market easing and falling inflation mean that workers are likely to demand smaller nominal wage increases in 2025,” Hilmar said.
He added: “While the data released looks worrying at face value, the broader picture is that wage growth is likely to slow significantly next year.”
