Euro Macro: Growth in labour costs weakened in 2018Q4 and is expected to continue to fall – Eurostat published its report on labour costs in 2018Q4 today. It showed that the rise in total labour costs slowed to 2.3% yoy in 2018Q4, down from 2.5% in 2018Q3. Wage growth stabilised at 2.3%, while the rise in non-wage labour costs slowed to 2.4% from 2.9%. The slowdown in non-wage costs reflects changes in government policy, such as cuts in social contributions and labour taxes paid by employers. As such, the shift in these labour costs does not reflect changes in labour market conditions. Looking at the details of the part of labour costs that does reflect labour market conditions, it turns out that wage growth in industry slowed from 2.1%to 1.9%. This probably reflects the (global) slowdown in industrial production that began in early 2018. Indeed, employment growth in manufacturing almost came to a standstill in the second half of 2018, and only expanded by 0.1% qoq in Q3 and Q4, down from 0.6% and 0.4% in Q1 and Q2, respectively. As the eurozone (as well as the global) industrial sector has remained in the doldrums in the first half of 2019, wage growth in industry should drop further this year. Besides wage growth in industry, wage growth in services moderated as well in Q4, to 2.5% yoy, down from 2.8% in Q3. Although activity and employment growth in the services sector as a whole has remained more positive than in manufacturing, parts of services have also weakened. For instance, employment in financial services and in real estate declined in the second half of last year.
Looking ahead, we think the decline in wage growth has further to go. The eurozone economy has grown at or below its trend rate since the first quarter of 2018 and we expect growth to remain subdued throughout this year (we expect GDP to grow by merely 0.8% over the year as a whole). This means that employment growth will probably be modest this year and that unemployment will roughly stabilise in the eurozone as a whole, and probably rise in some individual countries. Having said that, before economic growth started to slow at the start of 2018, there was still slack in the eurozone labour market. Indeed, we think that the pick-up in wage growth at the start of 2018 was merely temporary payback for the decline in real wages in 2017, which was due to a jump in energy price inflation in that year. To conclude, we expect inflationary pressures stemming from the labour market to ease further this year, implying that core inflation will remain close to its current level of around 1% this year, and will pick up slowly to around 1.2% on average in 2020. This is below the ECB’s forecasts of 1.2% and 1.4%, respectively. (Aline Schuiling)