Eurozone Wage Surges to Highest Level since 1993

The European Central Bank (ECB) on Wednesday released its euro zone negotiated wage data for Q3 of 2024, complicating the bank’s plans to cut interest rates as inflation eases.

The data showed that negotiated wages in the euro zone accelerated at an annual pace of 5.42% in Q3 of 2024 after growing by 3.54% in Q2 of this year, the highest increase since the first quarter of 1993.

The ECB expects wage growth to slow over the next two years, 2025 and 2026, but the strong wage gains were driven by data from Germany, where wages rose by 8.8% in the third quarter, the Bundesbank reported on Tuesday, which could limit the scope for future rate cuts.

There are concerns that this wage surge could dampen expectations of a significant rate cut in 2025. While the ECB has signaled that further cuts are likely due to weak economic activity, some officials are cautioning against a quick move, given ongoing wage pressures in the services sector.

“Our expectations continue to suggest that euro area wage growth will slow markedly next year as the effects of inflation control measures fade,” said Greg Fuzesi, an economist at JPMorgan. “With headline inflation now much lower, nominal wage growth will also reset to lower levels going forward once real wages have recovered sufficiently.”

The euro area labor market has been the ECB’s biggest headache as it tries to tame a rare surge in prices.

Unemployment is at an all-time low and companies are continuing to hire workers despite weak economic growth in the hope of retaining a full workforce while banking on an eventual recovery.

While the ECB has long acknowledged the need for wage adjustment, it has also called for moderation because excessive payouts can fuel inflation, creating a self-reinforcing vicious cycle.

But inflation has fallen faster than most expected, and price growth is now expected to return to 2%, perhaps as early as 2025, as companies absorb some of the wage gains through lower profits and price increases for imported goods and energy have also been particularly low.

Price pressures have weakened so much that some policymakers even fear the ECB could fall short of its 2% inflation target, requiring interest rates to fall to very low levels.

ECB President Christine Lagarde is due to speak at the ECB’s Financial Stability and Macroprudential Policy Conference 2024 in Frankfurt, Germany, today (13:00 GMT).