The ECB announced today the highly anticipated report on wage trends in the euro area in the first quarter of 2024, considered by President Christine Lagarde as a sine qua non to decide whether to cut the bloc’s rates for the first time since 2019, at the next meeting of the Governing Council, set for June 6.
The beacon that will illuminate the path of Christine Lagarde’s ECB in establishing the future direction of rates has finally been lit, and for now we can say that the indications will certainly not please the president of the European Central Bank.
In the Eurozone, in the first three months of 2024, negotiated wages have in fact returned to growing at an annual rate of 4.7%, at the same rate reported in the third quarter of 2023, therefore recovering compared to the 4.5% of the last quarter of last year.
“This signals that growth in negotiated wages has remained high in the euro area,” it is read in the ECB report dedicated to wage trends in the Eurozone.
The wages verdict arrives. In the first quarter of 2024 the trend will rear its head again
“Tracking euro area wages in exceptional times”, is the title of the ECB report, which says it all on the great headache of inflation which risks returning to afflict the Eurotower.
The times, in fact, they are “exceptional”, with inflation that doesn’t seem to want to stay behind the scenes.
Far from it, at least based on the indications received today from salaries.
The fact that the pace of growth has accelerated from the 4.5% to which it had slowed in the last quarter of 2023, returning to +4.7%, Lagarde, who is still obsessed with inflation, will certainly not like it, despite the greater flexibility shown in opening up to the possibility of cutting rates on June 6th. Greater flexibility which has been highlighted recently given that, just in recent days, speaking from Ireland, the president of the Eurotower indicated the presence of “a strong probability” of an imminent rate cut.
Today the cold shower came from the salary report published on the ECB blogauthored by economists Sarah Holton and Gerrit Koester.
The ECB indicator that monitors the trend of wages – wage tracker – “an important tool used to evaluate wage developments in the euro area” is signaling that, overall, wage pressures have moderated compared to 2023. At the same time – and this is the warning that inflation has practically thrown at Lagarde – wage growth is expected to remain high in 2024, showing an irregular trend.”
“These developments – we read – reflect the staggered nature of the wage adjustment process, in a phase in which workers continue to restore the real wage losses suffered from past price shocks”.
However, there is another factor which has affected and is affecting the wage trend and which refers to the “important role that extraordinary payments play in this process”. Own “These extraordinary payments are behind the growth in euro area negotiated wages during the first quarter.”
The two economists pointed out that, overall, wages have been starting in 2021 – which can be measured through compensation per employee (CPE) – are confirmed as high in the Eurozone.
The peak of growth was reached in 2023, when the trend soared up to +5.2%, at the record annual rate since the birth of the euro.
“Given the links they have with inflation – through demand and cost increase channels – wages are carefully monitored by central banks – the economists recalled, pointing out that, “in light of the importance of labor input costs in the service sector, wages are particularly important for services inflation”.
In turn services inflation “largely reflects domestic inflationary pressures and is closely linked to medium-term wage growth, which implies that the outlook for wage growth is especially crucial to the outlook for domestic inflation,” explained Sarah Holton and Gerrit Koester.
In illustrating the wage trend, the economists referred to the ECB indicator relating to the growth of negotiated wages in the euro area, which began to be compiled in 2001, drawing on data from nine countries: Belgium, Germany, Spain, France, Italy, Holland, Austria, Portugal and Finland.
This indicator, it was underlined, “is published on a quarterly basis and includes structural wage increases, as well as extraordinary payments.”
In addition to pointing out that the growth of this index it jumped from the pace of 1.4% in 2021 to +4.5% in 2023, the European Central Bank reported data for the first quarter of 2024, which confirmed the acceleration of wage growth at a rate of +4.7%.
That weakening of wage growth from +4.7% in the third quarter of 2023 to +4.5% in the final three months of last year it therefore lasted a quarter.
The data surprised the same audience of economists, who had predicted a stable or downward trend.
To affect its acceleration it was the Germany factor, as had already been anticipated yesterday, when the Bundesbank, the German central bank, announced that Compensation in Europe’s number one economy rose 6.2% in the January to March period, thanks to those extraordinary payments that were given to workers to compensate for the increase in the cost of living.
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The ECB recalled the difference that exists between the index that it draws up itself and which monitors the wage trend – wage tracker – and the item known as negotiated wages, underlining that wage trackers are calculated on the basis of micro data on wage agreements which are provided by Bundesbank, Bancode España, Dutch employers’ association AWVN, Austrian Oesterreichische Nationalbank, Bank of Italy and Banque de France.
Furthermore, economists have highlighted, regarding the wages negotiated using the ECB wage trackers, that these numbers consider extraordinary payments relating to the month in which they were paid. ECB wage trackers that include extraordinary payments instead spread the impact of extraordinary payments over a 12-month period.
Looking ahead, today’s ECB report revealed that negotiated wage growth is expected to remain high in 2024, something that is in line with “the persistence that has already been priced in the estimates developed by the Eurosystem staff and which reflects the wage adjustment process that lasts several years”.
The good news is that in the Eurotower analysis we read that “wage pressures are set to decelerate in 2024” and that the wage data monitored by the ECB (i.e. the wage trackers) relating to the first months of the year indicate that the same pressures are easing.
The same picture emerged from other indicators. For example, from the telephone survey with which the ECB interviewed companies in the euro area in March this year it emerged that companies estimate a slowdown in wage growth from +5.4% in 2023 to +4.3% in 2024.
Again, from the ECB survey drawn up in April 2024 which bears the name of Access to Finance of Enterprises (SAFE) It turned out that companies expect wages in the euro area to grow over the next 12 months, on average, by 3.8%, at a slower rate than the previous survey’s +4.5% for fall 2023.
However, it remains to be seen whether these reassurances are convincing Lagarde to take the plunge, the first after the series of rate increases launched in 2022 and 2023.
If for now the prospect of a cut in June is still practically taken for granted, the probability of a further cut in July seems oriented towards contracting more and more, also due to the dilemma that is besetting the Jerome Powell’s Fed.
It must be said that the probability of two consecutive cuts in euro area rates by the ECB, in the June and July meetings of the Governing Council, had already been undermined in recent days by the member of the Executive Committee Isabel Schnabel, despite the revelation that had emerged with the publication of the minutes relating to the last meeting of April 11th.
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The ECB’s first rate cut at the imminent meeting on 6 June 2024 therefore remains almost certain. As for the aftermath, the hope of consecutive cuts however, it continues to weaken.
