As European Central Bank President Christine Lagarde has repeatedly emphasized in recent speeches, rising wages are currently the ECB's biggest concern. Wage growth is expected to slow significantly through 2024 on the back of slowing inflation and worsening economic conditions, but the decline in negotiated wage growth in the fourth quarter from 4.7% to 4.5% is a negative for Frankfurt. It must be a relief.
Admittedly, this is only a small decline, but it is broadly consistent with expectations that negotiated wage increases will continue to trend downward through 2024. This is echoed by the European Central Bank's (ECB) own wage tracker, which monitors wage increases agreed in collective agreements. 12 months ahead. This trend has plateaued for some time, and recent contracts have been on the decline. Nominal wage growth is expected to decline even more significantly by the summer. While other indicators of wage growth have already started to decline cautiously, negotiated wages account for the bulk of wage trends in the euro area.
Still, the decline in the fourth quarter was a modest decline, so we do not expect the ECB to be particularly quick to decide on its first rate cut. The June meeting, after another quarter of wage data is released, looks like good timing for our first 0.25% rate cut.
Although nominal wage growth has declined, today's announcement marks the first quarter of real wage growth (i.e. wage growth – inflation) since the start of the euro area energy crisis. Ta. Therefore, the large decline in real wages has only just bottomed out, and the recovery is not expected to be particularly strong for now. The growth rate of nominal wages is expected to trend downward into 2024, and the upside in consumption is quite limited.
However, rising nominal wage growth will certainly increase cost pressures on businesses, and if the recovery in purchasing power leads to continued consumption, the return to the ECB's 2% target will be slower than expected. there is a possibility. Although these concerns should not be overemphasized in the current environment of lackluster economic activity, they are an important reason to expect the ECB to adjust monetary policy cautiously only in 2024. The total annual reduction is expected to be 0.75%.
