The wage increases negotiated in the eurozone agreement are part of the set of indicators on the basis of which the European Central Bank is set to set the tone for its monetary policy and decide, among other things, whether it is time or not to “raise, maintain or cut interest rates”. According to statistics published by the ECB yesterday, the increase in negotiated wages slowed significantly in the second quarter of the year, to 3.55% on average, compared to 4.74% in the first quarter. Not surprisingly, the annual increase in negotiated wages in the eurozone between April and June was the smallest since the last quarter of 2022.
This moderation in wages encourages expectations of a rate cut by the European Central Bank at its September meeting. In particular, it became known yesterday that a large majority of the ECB Governing Council members in July supported considering a new rate cut at the September meeting, as shown in the minutes of the meeting published by the monetary authority. At the same time, the latest inflation data in the euro area show an increase of one-tenth, to 2.6%, in July, while economic growth remains weak: in the second quarter, GDP grew by 0.3% compared to the first quarter (0.6% compared to the same period of the previous year).
Economic analysis
At the July meeting, the ECB’s chief economist, Philip Lane, pointed to “high” wage pressures that had emerged throughout the year, driven largely by workers’ expectations of a rebound in the purchasing power lost as a result of inflation accumulating since mid-2021.
However, Lane also expressed that, in the short term, surveys of employers and economists expect “a marked slowdown in wage growth in 2025,” as revealed in the minutes published on Thursday. According to their analysis, “the expected slowdown in wage growth next year is due to the fact that the recovery from past inflation will play a smaller role than the expected decline in inflation” in wage negotiations. This means that social agents will start to be more guided by lower inflation expectations in their wage negotiations.
This could indeed indicate the smaller figure for salary increases negotiated in July (3.55%), compared to those postponed since the first quarter of 2023 (always above 4%).
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It is still too early to consider this trend as entrenched. Especially since, as some ECB Council members noted at their July meeting, “real wages for a large proportion of workers in some countries are still below pre-pandemic levels.”
According to a recent report published by the OECD, half of the countries in its orbit have already recovered to the level of wages they were before the outbreak of the coronavirus, although this is not the case in Spain. The purchasing power of Spanish workers is 2.5% lower than it was before the outbreak of the pandemic.
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