Global Daily – Eurozone wage growth still subdued

by: Aline Schuiling , Bill Diviney

Euro Macro: Wage growth still well below levels needed to lift core inflation to 2% – Eurostat and the ECB have both published a range of wage growth measures for Q1 in recent weeks. Although the definitions differ somewhat between the various measures, the historical data tends to move broadly in sync. The year-on-year rise in the ECB’s series for wages per employee, hourly wages and negotiated wages all picked up slightly in 2018Q1, on average from 1.6% in 2017Q4 to 1.9% in 2018Q1. The Eurostat series for total labour costs rose from 1.4% to 2.0%, with the wages and salaries component increasing from 1.6% to 1.8% yoy and the non-wage labour costs (largely driven by government policy related to taxes and social security contributions) jumping from 0.8% to 2.6%. We think this pick-up in wage growth was largely due to the delayed effects of the energy price driven rise in headline inflation in 2017, as there is still significant slack in the eurozone labour market on aggregate. Indeed, the broader definition of U6-unemployment for the eurozone as a whole declined from 17.7% in 2017Q3 to 17.4% in 2017Q4, which is still well above the levels from before the global financial crisis in 2008 of just above 15%. This means that there is still very limited wage pressure stemming from labour market conditions in the eurozone on aggregate. Looking ahead, we expect wage growth to remain close to current levels throughout the year. This implies that upward pressure on core inflation will remain limited as well. Indeed, looking at historical patterns in wage growth, productivity growth and core inflation, wage growth would have to accelerate to around 3-3.5% before core inflation moves in the direction of 2% on a sustainable basis. We do not expect this to happen within the next few years. (Aline Schuiling)

Fed View: What could trigger pause in the rate hike cycle? – Chair Powell’s hawkish press conference last Wednesday, alongside a surprise upward shift in the ‘dots’ rate hike projections, give us even greater conviction in our call for the Fed to continue raising rates at a quarterly pace until June 2019 (see here). While the path of least resistance is for the Fed to keep hiking, however, there remain considerable risks to that outlook. The most likely reason for the Fed to pause, in our view, would be if trade tensions with key partners China and the EU escalated to the point that business confidence is significantly impacted, which would raise downside risks to what is at present an exceptionally strong growth outlook. In contrast to the decline in European PMIs, the US ISM manufacturing PMI remains – so far at least – well above long-term averages. Other potential triggers for a pause include renewed and successive undershoots of inflation (à la 2017), an accelerated flattening in the yield curve, or an escalation of recent emerging markets stress to a broader crisis. See our Short Insight: What could trigger a Fed pause? for further detail on the potential triggers. (Bill Diviney)