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German wage deal should give some comfort to ECB
February 6, 2018 / 10:41 AM / 3 months ago

German wage deal should give some comfort to ECB

FRANKFURT, Feb 6 (Reuters) - A landmark wage deal in Germany is likely to be greeted by the European Central Bank as a sign that pay is finally ticking up, easing some negative risks in the bank’s projections and keeping it on track to curb stimulus further this year.

German labour union IG Metall and a key employer group agreed late on Monday on a 4.3 percent wage rise spread over 27 months, setting a benchmark for millions of workers across Europe’s largest economy.

While the deal is well below initial demands, it is broadly in line with the ECB’s projection for slowly building wage and consumer inflation pressures, comforting policymakers who have faced negative surprises year after year as the labour market adjusted to unexpectedly large slack.

Having bought over 2 trillion euros’ ($2.5 trillion) worth of bonds to keep borrowing costs low, the ECB is now looking to end the buying as the economy motors ahead. Weak wage growth has been the biggest obstacle in lifting inflation back to the bank’s target rate of almost 2 percent.

“It’s a step in the right direction for the ECB... they can be moderately happy about it,” Commerzbank economist Michael Schubert said. “It might create very mild upside risks to projections but certainly not enough for us to change our assessment; the ECB will remain cautious and patient.”

“They’ll be cautious not because it’s just a first step but also because they look at everything else, like the euro appreciation and the equity market selloff,” Schubert added.

While euro zone employment is at a record high and the jobless rate is coming down fast, many of the new jobs tend to be lower quality and add little to wage pressures.

Immigration from the east also eases labour market stress and a broader measure of slack - which includes part-time workers seeking more hours and people excluded from the labour market for administrative reasons - may be twice as high as the official projections, ECB data shows.

Compensation per employee rose by around 1.7 percent last year and the ECB expects that to pick up to 2.1 percent this year.

“This deal should make the ECB comfortable that its wish for inflation to pick up in the coming years may come true,” ING economist Carsten Brzeski said. “But the emphasis is on may because this deal is not enough for inflation to pick up already.”

“With this deal, there is hope because all the ingredients are there for wages to rise but it’s too early to expect that this wage settlement will be the catalyst,” Brzeski said. “It’s not a signal of a wage spiral in Europe.” ($1 = 0.8065 euros) (Reporting by Balazs Koranyi; Editing by Susan Fenton)

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