Euro Zone Wage Growth Slows

(Reuters) – Euro zone negotiated wage growth slowed last quarter, bolstering the case for another interest rate cut in September and alleviating policymakers’ concerns about rising labor costs pushing inflation higher.

Wage growth fell to 3.55% in the second quarter, down from 4.74% three months earlier, largely due to a significant slowdown in Germany, the region’s largest economy, according to European Central Bank data released on Thursday.

The ECB has long considered this figure vital in policy discussions and suggested that a continued slowdown might accelerate policy easing.

The bank reduced interest rates by 25 basis points in June, a move some regarded as slightly premature, but maintained unchanged policy in July, offering little indication of its direction for September 12.

Nevertheless, markets predict a over 90% chance of another rate cut next month and foresee at least one more change before year-end, as price pressures seem to be diminishing amid economic uncertainties.

This economic fragility is why Finnish policymaker Olli Rehn has argued for a rate cut next month, while the German central bank indicated that a long-awaited recovery may be postponed once more.

Although wage growth may remain inconsistent and could increase again in Germany, some economists and policymakers contend it has reached its peak, aligning with the ECB’s projections.

Morgan Stanley noted, “We think that the first quarter has likely been the peak for negotiated wages in the euro area.”
They added, “The anticipated slowdown in compensation per employee indicates that wage growth is decreasing. This provides enough evidence for the ECB that wages are moving in the right direction.”

Despite wage growth exceeding the levels compatible with a 2% inflation target, ECB chief economist Philip Lane appears unconcerned. He maintains that previously negotiated wage deals ensure further deceleration in the upcoming quarters and that wages are still recuperating after rapid inflation over the past four years reduced workers’ purchasing power.