Tuesday 20 August 2019

ECB tips wage rises as positive inflation driver in the Eurozone

ECB president Mario Draghi
ECB president Mario Draghi
Donal O'Donovan

Donal O'Donovan

ECB President Mario Draghi has predicted that euro-area workers will soon start winning bigger pay increases, a trend he says will relieve pressure on his bank to keep supporting the economy.

The ECB president, who has for years struggled to combat low inflation, reiterated yeserday that a "key issue" keeping prices down is that wages aren't rising.

But after pumping in monetary stimulus that has helped bring unemployment down and spur consumption, he now sees a nascent change.

The ECB target is to get inflation to a level close to, but below, 2pc, but it has consistently failed to do that, even battling deflation in the post-crash period.

"With well-anchored inflation expectations, the effects of past low inflation in wage formation should not be persistent," Mario Draghi told an audience of bankers and policy makers in Frankfurt.

"As the labour market tightens and uncertainty falls, the relationship between slack and wage growth should begin reasserting itself. But we have to remain patient."

However here the CEO of employers' group ISME said there is a danger that ECB policies are out of tune with Irish reality. Wage demands in Ireland are being fuelled by property inflation, ISME CEO Neil McDonnell told the Irish Independent, but employers are simply in no position to close the gap.

"Employers have to manage on the cost side and cannot meet the expectations when it comes to accommodation," Mr McDonnell said.

Wage inflation in Ireland will be around 2pc this year, Investec chief economist Philip O'Sullivan said.

"Generally, across the economy there will be upward wage pressure," Mr O'Sullivan said.

Some of those demands - in certain sectors - are for outsized pay increases and there's a danger of losing competitive gains won since the financial crisis, he said.

However, higher pay primarily reflects the loss of so-called slack in the economy as the unemployment rate fell from 15.2pc at the peak to near full employment now, he said. "Irish workers' blood, sweat and tears helped turn around the economy, and they are now looking to share in the recovery," he said.

For the ECB, rising wages feeding into general inflation will allow it to unwind the extraordinary measures, including billions of euro of bond purchases and negative interest rates, currently being used to prop up growth.

Officials have already decided to pare back some support from January and Mr Draghi noted that economic growth in the region is "clearly improving".

However, he also warned that progress on consumer prices remains "incomplete and partial".

"Wage growth is key because it shapes the outlook for underlying inflation," said Bloomberg economist Maxime Sbaihi.

"The good news for the ECB is that compensation per employee is trending upward again; the bad news is that the growth rate remains too weak to be confident about inflation returning to target."

Ireland isn't alone in seeing pay demand. Germany's biggest union, IG Metall, is seeking a 6pc pay rise, well above the ECB's inflation goal of just under 2pc.

Still, no deal has yet been reached and the final settlement is typically lower than the initial offer. (Additional reporting Bloomberg)

Irish Independent

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