Project Slower GDP Deflator Moderation In 2024 Due To Higher Labour Costs and Profits

The ECB’s June macroeconomic forecasts record an upward revision to GDP deflator growth through 2024, with unit labour cost and unit profit growth revised higher.

• The higher unit labour cost projection comes as 2024 compensation per employee was revised higher and real productivity per employee was revised lower.
• This likely drove the upward revision to the ECB's core inflation forecasts, which were above analyst's median estimates coming into the decision.
• The upward revision to compensation per employee growth “reflects the impact of incoming data, a slightly better cyclical position and a higher wage drift, and is in line with a tighter labour market, especially towards the end of the projection horizon”.
• 2024 annual unit profit growth was revised 1.1pp higher relative to the March forecasts.
• However, the ECB still note that unit profits are “expected to remain notably below growth in unit labour costs throughout 2024, which implies that profit margins are buffering the relatively strong labour cost growth”.
• This expected dynamic is relatively unchanged compared to March, though the GDP deflator is now projected to moderate at a slower pace.
• Q1 deflator growth is seen at 4.1% Y/Y (vs 5.3% in Q4 2023 and a 3.6% forecast in the March projections).
• Tomorrow sees the release of the final Eurozone national accounts for Q1, which will allow us to benchmark the ECB’s latest projections immediately.
• A reminder that the June projections were compiled by Eurosystem staff (i.e. from national central banks), not the ECB staff themselves.