The European Central Bank Predicts "Very Strong" Wage Growth over the Next Few Quarters

Wage growth in the Eurozone is expected to be "very strong" over the next few quarters, but real wages are still likely to decline given the sharp rise in inflation, according to an article in the European Central Bank's economic bulletin released on Monday. Reuters.

A historic surge in inflation has eroded real incomes over the past two years and firms are finally starting to adjust wages, leading to concerns that high inflation could persist if wage-setting adjusts on a more permanent basis.

"Wage growth over the next few quarters is expected to be very strong relative to historical patterns. This reflects stable labor markets that have so far not been significantly affected by the economic slowdown, increases in the national minimum wage, and some catch-up between wages and high levels of inflation," the paper, written by ECB economists, concluded.

However, the expected economic slowdown, as well as uncertainty about the outlook, is likely to put downward pressure on wage growth in the near term, central bank economists said.

ECB President Christine Lagarde recently said wages are likely to rise at a faster pace than forecast and the bank needs to prevent this from raising long-term inflation expectations.

However, the ECB's bulletin article appeared to play down concerns about wages, arguing that real incomes will continue to fall as inflation will be higher than the strong increase in nominal wages.

"Real consumer wages are now significantly lower than before the pandemic and are likely to fall further in the coming months. This could lead unions to demand higher wage increases in the upcoming negotiations, especially in lower-wage sectors," the ECB concludes.