Bert Colijn, Senior Economist at ING, suggests that a deflationary spiral seems far away, but unemployment levels remain too high to cause significant wage pressures in the Eurozone.
Key Quotes
“Growth in labour costs in the Eurozone increased modestly to 1.3% YoY in the fourth quarter of 2015. Even though this is a 0.2 percentage point improvement from 3Q, it still leaves growth well below the 1.9% growth of the first quarter of 2015, while wages and salaries excluding benefits grew at just 1.5%, showing that wage pressures remain very weak in the Eurozone. In the business economy, labour cost growth stagnated at just 1.2%.
The fact that labour costs did not decline further is a positive sign as it does not point towards immediate deflationary spiral symptoms in the economy, but hope that the strong declines in unemployment at the end of 2015 had already resulted in stronger growth in wages has turned out to be idle. The weak wage growth environment plays an important role in the forecasts of the ECB about inflation in the years ahead and this release confirms that the current wage growth environment is not contributing to faster inflation.
Even though unemployment has been coming down quickly, labour market pressures still remain weak because it is coming down from such high levels. The natural rate of unemployment is estimated to be somewhere between 9.4% and 9.8% at the moment, which means that the current rate of 10.3% is unlikely to cause significant upward pressure on wage growth. At the current pace of job market recovery, this means it is unlikely that price pressures become stronger before the fourth quarter of 2016 – that is if job growth will not weaken in light of weaker global economic circumstances.
Even though the outlook for nominal wage growth remains modest at best, real wage growth is actually quite strong. The growth of 1% annually in real labour costs is comparable to the early 2000s and better than the boom years of 2005-07. The low inflation rate is causing the consumer to have more money in his pocket, while businesses can keep labour costs subdued. As long as this is temporary and does not cause a deflationary spiral of declining prices and wages, it provides some tailwind for Eurozone domestic demand.”
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