Eurozone wage growth surges in test for ECB rate cuts

Eurozone third-quarter negotiated pay rose 5.4 per cent from a year ago. PHOTO: BLOOMBERG

Published Wed, Nov 20, 2024 · 06:49 PM

A KEY gauge of eurozone wages jumped by the most since the common currency was introduced – complicating the European Central Bank’s plans for interest-rate cuts as inflation eases.

Third-quarter negotiated pay rose 5.4 per cent from a year ago, the ECB said on Wednesday (Nov 20). That is up from 3.5 per cent in the previous three months and was largely driven by Germany.

The data come less than four weeks before the ECB’s final policy meeting of the year, with officials tipped to lower the deposit rate for a fourth time. The surge in pay, however, could damp expectations among investors and analysts for a spate of rate reductions in 2025.

While most officials have signalled that more cuts are likely, particularly as the economy struggles to gain traction, the pace and extent is becoming increasingly controversial.

Some policymakers want rapid moves to underpin activity and avoid an inflation undershoot. Others urge prudence, mainly because of sticky price pressures in the services sector, where wage growth remains strong.

The ECB forecasts a sharp slowdown in pay increases in 2025 and 2026, helping to return inflation sustainably to the 2 per cent target.

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In Germany, negotiated wages, including ancillary agreements, rose 8.8 per cent from a year ago in the third quarter – the quickest rate since 1993, the Bundesbank reported on Tuesday.

But it also said the period may have marked the peak for wage increases, so that pace is unlikely to last.

Last week’s IG Metall key settlement for the manufacturing sector already locked in relatively moderate pay growth for the next two years.

German wages rose by most in three decades in Q3

British average weekly earnings, excluding bonuses, were 4.8 per cent higher in the three months to the end of September than a year earlier.

UK regular pay grows at slowest pace in two years, pointing to lower inflation

Forecasts by the commission showed eurozone growth accelerating slightly to 1.3 per cent in 2025, up from 0.8 per cent this year, while inflation in the 20-country single currency area was seen easing to 2.1 per cent, down from 2.4 per cent.

EU sees eurozone growth ticking up in 2025, but risks loom

Industrial production fell by 2 per cent compared to the previous month, exceeding a 1.4 per cent drop seen in a Reuters poll of economists, even as the previous month’s solid 1.8 per cent growth figure was revised down to just 1.5 per cent.

Eurozone industrial production falls more than expected in Sep

The overall eurozone economy grew by 0.4 per cent in the third quarter from the previous three months, Eurostat said.

Eurozone employment ticks up, GDP growth figure confirmed

While the ECB’s inflation assumption is based on a slowdown in salaries, it also does not want the labour market and advances in pay to moderate too much.

Chief economist Philip Lane said in October that a more robust jobs market “increases the likelihood of hitting the inflation target rather than being chronically below”, and that “wage increases would be more target-consistent in the coming years” than pre-pandemic. BLOOMBERG

Eurozone Wages European Central Bank Inflation

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