(Bloomberg) — German wages rose sharply at the start of 2024 — dealing a blow to the European Central Bank as it decides whether inflation is slowing enough to reduce interest rates.
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Negotiated pay increased 6.2% in the first quarter, the Bundesbank said Wednesday in its monthly report. That exceeded estimates by analysts at Bloomberg Economics, Citi and Morgan Stanley, though the figure includes one-off payments to compensate workers for the surging cost of living.
The data come just a day before a highly anticipated reading for the 20-nation euro zone as a whole. The worry is that stronger-than-expected salary gains in Europe’s largest economy mean inflation will take longer to return to the 2% target.
“Overall, there are still risks to the fundamental disinflation process,” the Bundesbank said. “Wage growth has recently been stronger than expected. As a result, still-high price pressure on services in particular could persist for longer.”
ECB officials have left little doubt that borrowing costs will be lowered on June 6, though they won’t commit to a path beyond that and say they’ll be guided by data. They currently see inflation returning to their goal in the second half of 2025 and will publish updated projections in just over two weeks.
But the newest data out of Germany mean that the euro-zone wide figure for negotiated pay will show an acceleration, increasing the risk that officials deliver less easing after June than currently predicted, said Tomasz Wieladek, an economist at T. Rowe Price.
“This will be a significant challenge to the idea that the ECB will deliver sequential rate cuts,” he said in a statement. “Wage data will allow the ECB to cut significantly eventually. But in the meantime, until the point when the data supports additional cuts, the ECB will need to be patient.”
Greg Fuzesi of JPMorgan took a similar view, warning that “the data could remind some policymakers of the difficulty of the ‘last mile,” with recent productivity disappointments also playing into this.”
Consumer-price growth in Germany will probably pick up in May and fluctuate around a slightly higher level in the coming months, the Bundesbank said. At the same time, the economy is set to gather pace as higher pay underpins consumption and confidence in the struggling manufacturing sector returns.
German Growth
Gross domestic product is likely to edge higher in the second quarter after it unexpectedly expanded between January and March, it said.
The Bundesbank warned that, for now, demand in manufacturing and construction continues to be weak — reflecting subdued global trade, higher borrowing costs and increased policy uncertainty. With a sustained industrial revival requiring a broad-based advance in new orders, improving sentiment “probably won’t be reflected in a noticeable increase in production momentum until the second half of the year,” it said.
Service providers, though, are likely to continue their recovery.
“Rising real disposable household incomes are likely to gain the upper hand over consumer uncertainty,” the Bundesbank said. “Further gains in purchasing power are to be expected as the labor market is likely to remain robust and wages will continue to rise sharply.”
–With assistance from Alexander Weber and Mark Schroers.
(Updates with economist comments starting in sixth paragraph.)
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