Key euro zone wage indicator picks up, bolstering case for ECB caution

Negotiated pay growth in the euro zone picked up slightly in the first quarter of 2024, European Central Bank figures showed on Thursday, bolstering the case for caution in cutting interest rates from record highs.

Negotiated wages in the 20 nation currency bloc rose by 4.69% in the first quarter after a 4.45% rise in the previous three months, as unions continued to demand compensation for real incomes lost to years of rapid inflation.

The ECB has long pinned rate cut hopes on this crucial and long-awaited wage figure but has essentially committed to policy easing on June 6, so the fresh number is more likely to influence policy decisions later in the year.

"Overall, negotiated wage growth is expected to remain elevated in 2024," the ECB said in a blog post published on Thursday. "However, wage pressures look set to decelerate in 2024."

It pointed out that advertised salaries for new hires are slowing, with the Indeed Wage Tracker decreasing to 3.4% in April 2024 from a peak of 5.1% in October 2022.

The ECB expects compensation per employee in the euro zone to grow by 4.5% this year, 3.6% the next and 3.0% in 2026.

This is more than the 3% the ECB sees as consistent with its own 2% inflation target.

But the central bank has also said that workers deserve some compensation for lost incomes, so a period of quicker wage growth was acceptable, especially since above-average corporate profit margins could absorb much of the increase.

"We do not expect the first quarter’s wage figures to stop the ECB cutting rates by 25 basis points in June, but we think stickier wage growth lowers the likelihood of back-to-back cuts in July," Diego Iscaro, an economist at S&P Global Market Intelligence, said.

Recent indicators, including a plethora of sentiment readings that tap into corporate intentions, have also shown cooling wage demands into the second quarter.

Indeed, even Bundesbank President Joachim Nagel, among the most conservative policymakers on the ECB's 26-person Governing Council, said wage developments were going in the right direction.

His comments came even as Germany, the euro zone's biggest economy, is putting upward pressure on the euro zone aggregate with a 6.2% increase in negotiated pay in the first quarter.

But economists say that Germany is merely catching up since negotiated pay growth was lagging there, so it is not the best indicator of future trends.

"In this sense, other countries may be providing the more meaningful signal at present," JPMorgan economist Greg Fuzesi said. "If correct, wage growth is still set to slow gradually now that headline inflation has come down a lot."

At 2.4%, euro zone inflation is now within striking distance of the ECB's 2% target but could still take until well into 2025 to actually get there, due in part to statistical effects and volatile commodity prices.

This price volatility in the months ahead is why some ECB policymakers say that the last mile of disinflation will be the hardest and most unpredictable, supporting their case for caution.

While the June rate cut is essentially a done deal, Thursday's wage figure is likely to be used by conservatives arguing for the ECB to skip a move in July.

ECB board member Isabel Schnabel, Belgium's Pierre Wunsch, the Netherlands' Klaas Knot and Latvia's Martins Kazaks have suggested that a second cut in July may be premature while Nagel also cautioned against expectations for back-to-back moves.

Some economists even argue that domestic disinflation is stalling, so the rationale for a June rate cut could also be questioned.

"If we look at the momentum of the domestic inflation pressure in the euro area, the developments are worrisome ... and certainly not something that the ECB can be happy about," Danske Bank's Piet Haines Christiansen said.

Markets now see just 60 basis points of rate cuts this year, so between one and two moves after June.