Germany’s Wage Surge Sparks Debate Over Planned Rate Cut

Wages in Germany are rising at their fastest pace in two decades, prompting concerns among some economists about the European Central Bank’s (ECB) expected interest rate cut next month. Data from WSI, a trade union think tank, reveals that negotiated wages in Germany are set to increase by 5.6% in 2024, marking the highest real-term pay hike since records began in 2000.

Despite this significant wage growth, which exceeds the ECB’s 2% inflation target, policymakers in Frankfurt remain unfazed. The ECB believes that workers are still recovering from the erosion of purchasing power caused by previous inflation. Even with the upcoming pay rise, German workers have only recouped half of their losses from 2021 to 2023.

ECB President Christine Lagarde has cited Germany’s recent 12% wage deal for public sector workers as a reflection of this catch-up trend. However, the ECB continues to predict a more than 90% chance of a 25 basis point rate cut in September, following the reduction of the deposit rate from 4% to 3.75% in June.

Some economists, like Austria’s central bank governor Robert Holzmann, caution that rising eurozone labour costs could harm the region’s competitiveness. Holzmann warns that wage negotiators should moderate their demands, and companies should focus on productivity improvements.

The debate over the ECB’s approach is further fueled by the potential for additional large pay deals, such as Germany’s IG Metall union’s upcoming push for a 7% wage increase for 3.9 million workers in the metal and electrical industries.

While some investors remain confident that higher wages will not trigger a wage-price spiral reminiscent of the 1970s, others emphasise the need for the ECB to remain vigilant. As profit margins narrow and demand weakens, the central bank faces the challenge of balancing wage growth with the broader economic stability of the eurozone.