Negotiated wage growth in the euro zone accelerated to 5.42% in Q3 from 3.54% in Q2, reflecting workers’ efforts to recover income lost to inflation, European Central Bank (ECB) data revealed. While the rise supports caution on rapid interest rate cuts, markets still expect reductions in December, with the 3.25% deposit rate potentially dropping to 2% or lower in 2025.
Some policymakers argue that recent modest wage deals, such as Germany’s IG Metall agreement for a 5.5% increase over 25 months, indicate a cooling trend. Economists, including JPMorgan’s Greg Fuzesi, predict slower wage growth in 2024 as inflation catch-up effects wane.
Despite slowing price pressures and inflation expected to reach the ECB’s 2% target by early 2025, the labor market remains tight. Unemployment is at record lows, and firms continue hiring, hoping to retain workers for a future recovery. This labor hoarding has boosted unions’ bargaining power, leading to wage increases that could risk reigniting inflation.
The ECB has called for wage moderation to avoid fueling a price-wage spiral, though companies are absorbing some costs via lower profits and weak import price growth. Some officials now fear inflation could fall below target, potentially necessitating ultra-low rates in the future.