Wage trajectories across the Eurozone’s biggest economies suggest that aggregated Euro area negotiated wage growth could pick up from 1.7% YY in 4Q-21 to slightly above 3% YY in early 2023.
US, Euro Area – Wage Growth (YY %) |
Euro Area: HICP and Compensation per Employee Indices (2015=100) |
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© 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. |
© 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. |
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Source: Citi Research, Eurostat, ECB |
Source: Citi Research, Eurostat, ECB |
Citi Research analysts make five points as to why they think this is likely the case:
- The first is that the new note marks a significant change in wage forecasts. Analysts had assumed that Eurozone wages would not accelerate much in 2022. However, the more persistent and considerably higher peak in realized inflation, plus timing of the German minimum wage hike decision, combined for this change of view. Strong labour markets in some countries also contributed.
- Wage growth is likely to look high in 2022 and 2023 because of second round effects and government policies, even if this does not necessarily reflect a closing demand gap. This could give a hawkish ECB the excuse to exit negative rate territory, despite headline inflation moves back below 2%.
- Even at above 3% YY, nominal wage growth will not fully offset higher price inflation in 2022 and hence still imply negative real wage growth this year, preventing the demand gap to close fully. In 2023 though, when base effects should bring headline inflation much lower, real wage growth should return to positive territory. Higher wage growth and lower inflation will reverse at least partly the loss in real spending power in 2021 and 2022 and should help boost consumption into 2023 and 2024.
- The Eurozone aggregate would conceal significant cross-country variation. Germany will likely experience the strongest wage growth due to the minimum wage hike and the tightest labour market, even more so than in recent years – see the chart below.
Ultimately, higher inflation in Germany should allow the periphery to run slightly higher inflation as well, which is beneficial for its debt sustainability. On the other hand, significant economic divergence within a monetary union is difficult to deal with by a single monetary policy. The policy stance may risk being set too tight for the periphery (Italy in particular which is looking to be the main laggard in the reflationary process) and generate renewed debt sustainability concerns.
Moreover, faster-growing Germany could also widen the social gap between wealthier core European nations and the periphery, reigniting the centrifugal forces in the Eurozone which had faded in recent years.
Euro Area: Negotiated Wages (%, YY) |
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© 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. |
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Source: Citi Research, ECB |
- The ECB’s December forecasts already incorporated a similarly-strong wage dynamic. Compensation per employee was seen rising to 2.9% both in 2023 and 2024, which would be the strongest pace since 2008. With data since December all pointing to higher wage dynamics, the chances are that the March forecasts will see an even higher wage growth. With trend (per hour) productivity growth averaging just 1% YY in the past decade, such wage growth would be consistent with at-target inflation.
The full note provides a country-by-country guide to wage growth patterns across the Eurozone’s largest economies. To read it in full, please see European Economics Weekly - Eurozone Wage Growth Set to Reach 3%, first published on February 4th.
Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.
