MNI INTERVIEW: German Pay Rises To Add To Inflation- Wise Man

Previous German pay rises are likely to continue to put upward pressure on prices this year even as new nominal wage demands become more closely aligned with falling levels of inflation, a leading German labour market specialist and government “Wise Man” adviser told MNI.

Preliminary Federal Statistical Office data indicates nominal wages increased by 5.9% last year, “exactly the annual average inflation rate,” noted Martin Werding, a member of the German Council of Economic Experts. “That means on average real wages have stagnated last year. In terms of inflationary pressures, of course, this is good news.”

However, the effects of wage settlements struck last year will only become evident this year, with the service sector likely to be particularly affected, he said.

“The data are not alarming thus far, but there is a certain risk,” said Werding, “That's exactly how the GCEE foresaw things developing in November, so the outlook in a sense is unchanged. There are still risks out there, the story isn’t over. But the situation of the German labour markets is not worrying.”

HIGHER PURCHASING POWER

Unions may be emboldened in their demands should striking train drivers succeed in securing reduced hours without a pay cut, plus a one-off payment, but few will be able to exercise as much power over employers, he said.

“Up to a point they will still just try to fix what they reached in 2023 by asking for higher wage increases.”

Having slipped into recession last year, German officials are pinning hopes of recovery on improved household purchasing power translating into more spending. However, Werding, a professor of social policy and public finance at the Ruhr University Bochum, said it was too soon to say what overall effect this would have on inflation.

“Stronger consumer confidence would clearly be important for growth. In his sense, having an increase in real wages has two possible effects: It might feed through to inflation or it might encourage consumers to spend more, but with inflation still at an acceptable level.” (See MNI SOURCES: "Biggest Minority" Favours ECB June Cut)

In November, Germany’s employment rate rose by 0.1 percentage point compared with the previous month, to 76.9%, up 0.4 point year-on-year. Unemployment was almost unchanged from October 2023 at 3.1%, “so from the situation in the labour markets themselves, there is room for additional inflationary pressures,” Werding said.

Nor are tight labour market conditions likely to ease significantly, he suggested, despite the country’s poor medium-term growth outlook.

“Labour hoarding is something that German companies have learned is important over the last two larger crises. The German labour market is built on long-term relationships between employers and employees. Keeping this intact, possibly with some support from unemployment insurance, that's something that companies would go some way for. They will do a lot to keep their experienced workers on board.”

CONSTITUTIONAL COURT

The decision last year by Germany’s Constitutional Court not to allow the government to use EUR60 billion in borrowed funds - necessitating a rebalancing of the Federal budget over the coming years while sharpening existing debt and spending rules - may lower growth somewhat, but is not ultimately as decisive a factor as might be assumed, Werding said.

“Having government spending not increasing by around 2% of GDP - which would have been feasible under the old interpretation of the existing rules, but which is now no longer feasible - might make a difference for the growth rate this year. But the most important things are really the limiting factors for growth that come from labour shortages, plus low investment. And not just public investment," he said.

Werding was less than effusive regarding a recent proposal by Jens Suedekum, Michael Huether and Clemens Fuest, economists seen as representing no single political perspective, to create a constitutionally-supported special fund for investment - although he did not rule it out. (see MNI INTERVIEW: ECB At Risk Of Overtightening - Suedekum)

“I'm not 100% convinced,” he said. “They did not talk about the potential volume, and from the trade union side there came figures of around 600 billion, which would be excessive. But when comparing it to all the existing alternatives, it’s clearly worth thinking about.