German negotiated wage growth slows in likely relief for ECB

6:29 am Tuesday, August 20th, 2024

FRANKFURT (Reuters) – Growth in negotiated wages across Germany slowed in the second quarter, providing some relief to European Central Bank policymakers and possibly bolstering the case for another interest rate cut in September.

Negotiated wages rose by 3.1% in the second quarter after an alarmingly high 6.2% in the previous three months, suggesting that pressure on inflation from labour incomes may continue to ease, data from the Bundesbank, Germany’s central bank, showed on Tuesday.

The ECB has long focused on negotiated wages and argues that even if current growth rates are still high, collective agreements already struck point to lower figures in the quarters ahead and will help bring inflation back down to 2% by next year.

Still, Tuesday’s figures may concern some policymakers as wage growth excluding one-offs, such as bonuses and inflation compensation payments, accelerated to 4.2% in the second quarter from 3.0% three months earlier.

However, monthly figures painted a more nuanced picture with the rate in June down to 4.1% from 4.7% in May.

Markets currently see a more than 90% chance of a 25-basis- point rate cut in September and expectations were bolstered overnight when Finnish central bank chief Olli Rehn said that weak economic growth may warrant easing next month.

The Bundesbank nevertheless warned that wage growth is still quick and focus should shift to wages without the one-offs, since unions continue to demand big pay increases.

“Wage increases over a twelve month period were between 4% and 6% in almost all sectors that agreed to a new collective agreement in the second quarter,” the bank said in a monthly report. “High new agreements are also emerging in the upcoming negotiations.”

ECB chief economist Philip Lane has repeatedly said that wage growth around 3% would be consistent with an inflation rate of around 2%, so a further slowdown in income growth may be warranted.

But he also argued that a limited period of wage catch-up was warranted, since workers had lost a large chunk of their real incomes to inflation in recent years.

The ECB sees growth in compensation per employee averaging 4.8% this year and falling to 3.2% by 2026.

(Reporting by Balazs Koranyi; editing by Giles Elgood)