Short Insight – The Euro’s eastern tigers

by: Aline Schuiling ,

Dear Reader,

This is the first edition of our new publication: Short Insights. The publication aims to shed light on interesting developments in the economy, monetary policy and financial markets. It aims to do this in a focused and concise way. The publication will always be two-pages long and contain 3-4 key graphs. As such, we hope that our readers can pick up interesting insights in a quick way, without having to navigate their way through long reports. Your thoughts and feedback on our new publication series, would be very welcome as always.

Kind Regards,

Nick Kounis

Head Financial Markets Research
ABN AMRO | Group Economics

 

  • Wage growth and inflation in the eurozone are annoyingly low …
  • … but the small Eastern European member states already meet the ECB target…
  • … with the labour market tight and wage growth accelerating strongly
  • We expect further inflationary pressures in Eastern Europe down the road
170926-Short-Insight-The-Euros-eastern-tigers.pdf (59 KB)
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1. Core inflation in small EE countries meets the ECB target

Core inflation in the eurozone persistently has been too low according to the ECB’s target during the past couple of years. In August it came in at 1.2%.

Still, the chart on the right shows that the aggregate of the small Eastern European countries Estonia, Latvia, Lithuania, Slovenia and Slovakia has already risen to ‘close to but below 2%’

As the combined weight of these countries in eurozone GDP is merely 2%, the contribution to total inflation is only marginal, unfortunately.

 

 

 

 

 

2. Wage growth in EE, LT, LV, SI and SK has accelerated

The low level of core inflation in the eurozone is largely due to sluggish wage growth. Hourly wages rose by 1.7% yoy in Q2, up from 1.6% in Q1, according to ECB data.

Wage growth in the five small Easters European counties has not only been almost three times as high as the eurozone total during the past few years on average, but it has also accelerated significantly since the middle of last year. It contributed about 0.2 pps to eurozone wage growth in Q2.

 

 

 

 

 

 

3. Labour market in small EE countries has tightened …

Economic growth in the five small EE countries mentioned above has been well above the eurozone in the past few years and, since the end of 2015, also higher than their own potential growth rates. This means that the labour market in these countries has tightened.

In 2016, for the first time since 2008, the average unemployment rate of the small EE countries was below the NAIRU. We expect unemployment to continue to move lower during the rest of this year and the next, which means that we can expect further inflationary pressures going forward.

 

 

 

 

 

4. … while wages are also converging towards the average

Besides the tightened labour market, wage growth in the five small EE countries is also fuelled by the fact that these countries have some catching up to do. The average yearly wage per person is about 25% of the eurozone average. In the convergence process towards the eurozone mean, wages in small EE countries tend to growth faster than the eurozone average.