German wage deal could pave way for much-needed consumption boost
* German public sector deal to embolden other workers
* Better pay deals should bolster consumption
* Some municipalities to raise charges to cover wage hikes
By Sarah Marsh and Alice Baghdjian
BERLIN, April 2 (Reuters) - A German public sector wage rise secured at the weekend is likely to bolster wage demands in the private sector that will pressure companies but could also pave the way for a much-needed revival of consumption without risking undue inflation pressure.
Under a deal agreed on Saturday, around 2 million public sector workers are set for a 3.5 percent pay increase this year and a 6.3 percent increase over two years, including this year.
The increases are above expectations, much to the dismay of some already cash-strapped municipalities, and are likely to embolden employees in other sectors to demand wage rises as the German economy continues to outperform its euro zone peers.
"Other trade unions will table similar demands and in those industries which cyclically seem to be doing fine, such as metal engineering, the result will be slightly above the result for the public sector," said Berenberg Bank's Holger Schmieding.
"Workers think they can push harder in these industries, as they see the public sector as having to be cautious due to the euro zone crisis."
Years of restrained wage growth has boosted Germany's competitiveness, and combined with labour market reforms, has helped cut unemployment to its lowest in two decades at 6.7 percent. Workers have often agreed to forego wage hikes in return for job security.
But economists say this trend has also dampened consumer spending, making Europe's biggest economy too reliant on exports which are vulnerable to uncertain global growth and weak demand in the euro zone while it tackles its debt crisis.
Real compensation in Germany has actually fallen since the birth of the single currency in 1999, according to the Organisation for Economic Cooperation and Development (OECD).
"This (deal) provides some hope in rebalancing of the economy," said Jennifer McKeown at Capital Economics. "What we need to really undo those imbalances is a strong consumer recovery, but so far, we are only seeing a pretty modest recovery ... It is not enough to pull peripheral countries out of their recession."
This year, wages for some 9 million workers in Germany's 41 million workforce are up for negotiation and the country has seen a series of strikes recently, putting pressure on employers to raise initial pay offers.
Services union Ver.di is now urging strikes at Deutsche Telekom in order to push through its demand for a 6.5 percent wage hike for around 51,000 workers.
German wage deals reached so far this year have outstripped inflation, which registered 2.1 percent in March. The steel sector agreed a 3.8 percent hike for some 75,000 employees while Deutsche Post agreed a 4 percent hike for 130,000.
Other sectors are calling for wage hikes of around 6 percent, with the powerful manufacturing union IG Metall seeking a 6.5 percent hike for three million people.
That could pose inflation risk over the medium term given that the European Central Bank is expected to keep interest rates at a low 1 percent until well into next year.
"The wage rises presents a danger in terms of fuelling inflation in the medium run. The ECB's monetary policy is already too loose for Germany and will be even more so going forward," said Ulrike Rondorf at Commerzbank.
Yet a number of economists say that if wage deals continue to stay below 4 percent, they are unlikely to fuel too much inflation given accompanying productivity gains.
"I don't think the public sector wage hike is very inflationary," said Berenberg Bank's Schmieding.
"If you have productivity gains of 1.5 percent, you end up with a rise of labour unit costs of 2.5 percent ... not the kind of runaway inflation that Germans are typically afraid of, that would undermine the value of their wealth."
Schmieding said inflation would only begin to be problematic if such wage deals were struck over a long period of time.
One immediate, albeit moderate, second-round inflation effect could be higher municipality charges, as authorities look for ways to fund higher wages for public sector employees.
The deal agreed on Saturday will cost communities some 2.2 billion euros in 2012 and about 4.3 billion euros in 2013. While some communities can amply afford this, others will have to scrape together funding.
"Some communities can barely afford these costs and will sink further into debt," said Franz-Reinhard Habbel, a spokesman for Germany's Association of Towns and Municipalities. "We'll have to consider raising certain charges and taxes."
German consumers are traditionally big savers compared to their counterparts in the United States and much of Europe. Finance Minister Wolfgang Schaeuble said on Saturday the public sector deal was unlikely to boost domestic demand dramatically and economists agreed Germans were still more likely to save than spend.
However, GfK's consumer confidence index has risen for six out of the last seven months and remains near a year-high. Meanwhile, imports rose by 2.4 percent in January, faster than exports and beating forecasts.
Economic growth is expected to slow to 0.7 percent this year, from 3 percent last year, but Rolf Buerkl, a researcher for GfK market research group, said inflation-beating pay rises could see consumption growth exceed overall economic growth this year for the first time in years.
"This (public sector) agreement puts wages above the expected inflation rate, which means a rise in real wages which should have a positive effect on consumption," said Buerkl.
"We are sticking to our forecast for private consumption to grow 1 percent this year after 1.5 percent last year." (Writing By Sarah Marsh; Editing by Susan Fenton)