German wage catch-up continues even as economy shrinks, Bundesbank says

FRANKFURT (Reuters) -German wages are continuing to grow briskly despite a shrinking economy as workers regain more of the purchasing power they lost to high inflation, the country’s central bank said on Thursday.

The German economy, Europe’s largest, has barely grown in two years, hit by a surge in energy costs following Russia’s invasion of Ukraine, weaker global demand and tough competition from China in the car and solar energy sectors.

But its labour market, particularly in services, remains tight and workers are still in the process of regaining the standard of living they had before the surge in inflation.

This meant that wage growth remained high — with collective wage agreements up 6.2% between January and August compared to a year earlier, according to the Bundesbank.

It calculated wage growth of 4% for the last quarter of next year based on already signed agreements. This would still be above the 3% pace that the European Central Bank sees as compatible with its 2% inflation target, assuming 1% growth in productivity.

“These findings do not fundamentally call into question the expected disinflation process in Germany,” the Bundesbank said in its monthly report. “However, in addition to productivity developments and companies’ profit margins, the labour market situation is of great importance for the speed and extent of disinflation.”

The ECB has listed higher-than-expected wage growth as the number one risk to its expectations for a stabilisation of inflation at its 2% target.

For now, however, real wages in Germany were 2% below the level they had attained in the third quarter of 2021 in the services sector and 4% in manufacturing.

The Bundesbank added that gross domestic product likely shrank again in the third quarter of this year but the country should avoid “a significant, broad-based and prolonged decline in economic output”.

“From today’s perspective, economic activity could broadly stagnate in the fourth quarter,” the Frankfurt-based central bank said.