European Central Bank officials on alert for any sign record inflation might ignite wage pressures are now wondering if they may need to keep waiting.
With soaring consumer prices showing little signs so far of feeding a pay spiral in the eurozone, the region’s labour market faces an even bigger cost-of-living increase as energy prices soar after Russia’s invasion of Ukraine.
While a new inflation shock could embolden workers’ demands, the threat to growth is making some policy makers less confident of a pronounced wage response as they prepare for their first decision since the war began.
Pay pressures are a key element in determining the urgency of an ECB exit from emergency stimulus. Most economists expect officials meeting on Thursday to delay a possible verdict on winding down bond purchases.
“On one side you have higher inflation, but you also might have less demand,” said Marion Amiot, a senior economist at S&P Global Ratings in London. “We should still see an upward rise in wages, but all other things being equal, this conflict could mean that the recovery in wage growth will take a little bit more time.”
Inflation had reached the fastest in the history of the euro even before the invasion of Ukraine late last month. It is now approaching 6%, triple the ECB’s official target. That’s largely driven by surging energy costs, a burden likely to persist until Europe reduces its dependence on Russian gas.
“Energy prices will be a major determinant of how the ECB eventually reacts. Another huge increase, together with shocks to sentiment, would depress demand in the economy. We expect the Governing Council to focus more on that than on the risks posed by higher inflation to wages,” said David Powell and Maeva Cousin at Bloomberg.
It’s far too early to measure any wage effects yet. But before this crisis, surging prices in the wake of the pandemic had prompted noticeably more moderate gains in the euro area than elsewhere.
“Our wage tracker has risen sharply in the US and UK to nearly 5%, but remains low in the euro area and Australia at around 2%,” Goldman Sachs Group Inc economists Daan Struyven and Yulia Zhestkova wrote in a February 19 report, citing their analysis of leading indicators on pay.
The contrast partly reflects a lack of renewed wage bargaining in the euro region. With furlough schemes having preserved millions of jobs, fewer people need to search for new ones or negotiate better terms. Amiot at S&P also points to government efforts in countries such as Spain to shield consumers from the worst of higher energy costs.
Such impacts are borne out in the data. Negotiated wages in Italy only grew an annual 0.6% in January. Even in Germany, the region’s biggest economy, pressures so far have been muted even as prices surge. The Bundesbank warned last week that inflation may average 5% this year because of energy costs.
Bargained pay in Germany saw an average increase of just 1.3% last year, the least since the series started in 2010. The country’s second-largest union secured a pay increase of only 2.8% for employees of federal states late last year, plus a tax-free bonus of €1,300 ($1,419).
“There are good reasons to think that second round effects are still far and not yet a concern,” ECB Governing Council member Mario Centeno told Bloomberg last week. “The Ukraine crisis will delay this even further, for sure.”
Centeno, who has a background in labour economics, says the renewed ability of workers to move around the region after the easing of pandemic restrictions should also help keep a lid on pay. That’s even before considering the possibility that hundreds of thousands or perhaps even millions of refugees from Ukraine could potentially need jobs too.
Not everyone is sanguine about euro-region wages, and officials in Germany are particularly on edge. Werner Eichhorst, who coordinates research on European labour market and social policy at the IZA Institute of Labor Economics in Bonn, highlights the persistence of labour scarcities, exacerbated by Europe’s ageing population.
“This tends to make the situation easier for employees – that would only change if we had a long-term economic crisis,” he said. “I don’t see any reason why the unions will hold back when it comes to wage negotiations. They’ll try to at least keep up with inflation.”
A major test will come this fall, when Germany’s biggest union, IG Metall, negotiates wages for metals and electricals industry workers. Such deals are often seen as a bellwether for the labour market.
In Spain, where inflation hit a 33-year high in February, Prime Minister Pedro Sanchez last week called on unions and businesses to avoid fuelling a new price spiral in upcoming pay talks.
Notably too, the European Commission, whose pre-conflict forecast showed inflation slowing below the ECB’s 2% target, last week cited the possibility of “second-round effects from potentially above-productivity wage increases,” even as it warned of a risk to growth.
With such threats in mind, ECB policy makers still agree a path to ending below-zero interest rates and years of bond-buying is appropriate, even if it might now take longer.
They differ in assessing inflation however, with some worrying wages could take off, and others less convinced. Chief economist Philip Lane said last week that even price measures which strip out energy costs might reflect temporary shifts rather than sustained demand.
Such considerations will be important as policy makers try to discern if inflation is durable enough for them to raise rates, with wages a central element to gauging that.
“Overall the labour market is doing well,” said Amiot at S&P. While the Ukraine war isn’t likely to derail that, “it might just delay faster wage increases,” she said.
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