UPDATE 1-Germany agrees another inflation-beating wage hike

Wed May 15, 2013 6:55am EDT

* Engineering union in Bavaria secures hefty wage hike

* Serves as basis for nationwide sector agreement

* Signals 2nd year of solid, inflation-busting wage hikes

* Will help to fuel German consumption, support euro zone growth

By Jens Hack and Sarah Marsh

MUNICH/BERLIN, May 15 (Reuters) - Germany's IG Metall engineering union secured a deal on Wednesday for an inflation-beating wage increase for workers in Bavaria, which will serve as a basis for a nationwide agreement for 3.7 million employees.

The deal signals a second year of hefty wage hikes, which economists say will not fuel inflation unduly but could help bolster consumption at a time when Europe's largest economy is under pressure from its neighbours to do more to stimulate growth and help drag the region out of recession.

Less than five months before a German election, unions have been pushing for strong wage hikes, confident that politicians will back them.

The German economy lost momentum last year and contracted 0.7 percent in the final quarter, picking up in the first three months of this year by eking out a meagre 0.1 percent growth, according to data released on Wednesday.

Private consumption almost exclusively drove growth in the first quarter, and wage hikes together with low unemployment are likely to boost it further, economists said.

Economists said that by increasing labour unit costs, such deals also reduce German competitiveness, helping to even out imbalances within the euro zone, where many countries are under pressure to carry out internal devaluations.

Metal and engineering workers in the southern state will get a 3.4 percent increase in July, followed by a 2.2 percent hike in May 2014. The agreement, which economists said was equivalent to annual pay hikes of 3 percent, runs for 20 months and averts the prospect of protracted strikes in the sector.

Wages of some 12.5 million workers are due for negotiation this year and economists reckon their paychecks will outpace inflation to rise between 2.5 and 4.0 percent. Negotiated wages climbed by an average 2.7 percent in 2012.

"Wage increases of roughly 3 percent per year are not excessive, but boost real incomes as inflation runs at about half that rate," said Christian Schulz at Berenberg Bank. "That's positive for consumption and - by extension - imports"

"Stronger German imports should help the euro zone crisis countries export their way out of trouble."

PILLAR OF SUPPORT

Moreover leaders from the euro zone and further afield have called on German politicians to do what they can to boost domestic consumption and strengthen the German economy, which has supported activity in the crisis-ridden euro zone over the past few years. The bloc contracted for the sixth straight quarter at the start of this year.

Years of wage restraint, combined with labour market reforms, have helped turn Germany - once described as the "sick man of Europe" - into an economic success story.

But German paychecks have begun to creep higher. In 2012 IG Metall, an industrial union which is negotiating for around 4.3 million industrial workers this year, clinched its biggest pay rise in 20 years - a 4.3 percent wage hike over 13 months.

"This acceptance of rising unit labour costs marks a notable break with the wage setting behaviour of the past decade," said Greg Fuzesi at J.P. Morgan. "This is clearly positive for consumer spending, although the latter also depends on other income components, which were weak last year."

"Wage hikes that are higher than in the rest of the euro zone mean private consumption will remain a pillar of support for the economy," said Alexander Krueger at Bankhaus Lampe. "We will unlikely have a short-term impact on inflation, although it will rise a bit next year, probably to around 2 percent."

Annual inflation was running at 1.2 percent in April, leaving plenty of leeway for such increases before it exceeds the European Central Bank's target for price stability of just under 2 percent.

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