Bert Colijn, Research Analyst at ING, notes that the growth in labour costs in the Eurozone increased modestly to 1.3% y-o-y in the fourth quarter of 2015.
“Even though this is a 0.2 percentage point improvement from Q3, 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.
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 so far. At the current pace of job market recovery, this means it is unlikely that price pressures become stronger before the fourth quarter of 2015. That is if job growth will not weaken in the light of weaker global economic circumstances.
This does not mean that wage pressures are equally weak by country. Labour shortages are very different by country and Germany for example has seen labour costs increase by more than 2% in all quarters of 2015. Other Central European countries are seeing even stronger growth in labour costs, as Austria and Slovakia saw growth exceed 5%. Italy on the other hand is now going through nominal declines in labour costs, which is an extraordinary adjustment. Although this is long overdue according to some and will help their competitiveness, it does not bode well for domestic demand in the Eurozone’s third largest economy in the short-run.”
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