Inflation in the euro area in October reached 10.6% year on year. So far, this growth has largely been attributed to factors beyond the control of the ECB, such as higher energy and food prices. However, the ECB is concerned about two risks: inflation expectations may not materialize, and higher wage inflation could lead to a wage-price spiral. Fortunately, the data so far points to wage growth in 2023, followed by a return to normal income growth in 2024, rather than an acceleration in wage and price growth. A German example of this is this: in Baden-Württemberg, the powerful metalworkers’ union IG Metall and industry employers reached a regional agreement for 2023 and 2024 on Thursday. All employees will receive a tax-free lump sum of €3,000, two installments equal to approximately 2.5% of two years of income. In addition, recurring fees will increase by 5.2% in June 2023 and another 3.3% in May 2024. Overall, the deal is very high in our opinion, but two elements make it somewhat acceptable. Firstly, the fact that it is designed for two years gives companies a sense of confidence in the future. Secondly, a one-time payment is a one-time response to rising energy prices, and not a permanent increase in business costs.
The deal is likely to be expanded to include all of Germany’s 3.9 million workers, following the scheme the chemical industry laid off for its 600,000 workers in October. After a holding period from April to December 2022, the average wage in early 2023 will be 6% higher than a year ago. For this calculation, we allocate the cost of two tax-reduced lump sums of €1,500 each over the payroll period. Wages will rise another 3.25% in January 2024 under an agreement that runs until mid-2024. High gas and electricity prices are not only fueling demand for higher wages. They are leading Europe into a severe recession, which could be followed by a stabilization in the spring and a sharp recovery from the summer of 2023.
* Messrs. Holger Schmieding, Callum Pickering and Salomon Fiedler are economists at Berenberg Bank.
Lori Barajas is an accomplished journalist, known for her insightful and thought-provoking writing on economy. She currently works as a writer at 247 news reel. With a passion for understanding the economy, Lori’s writing delves deep into the financial issues that matter most, providing readers with a unique perspective on current events.