* 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
By Jens Hack and Sarah Marsh
MUNICH/BERLIN, May 15 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
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.