Wage Growth Diverges From Traditional Barometers (2/3)

Employment barometers in the IFO survey have weakened in recent months, with the July manufacturing print of -6.2 a 30-month low, and services at 5.4 a 27-month-low (albeit still in expansionary territory).

• However, nominal wages - which tend to track the employment barometer reasonably well (see chart) - have not followed suit and have pushed higher.
• This divergence can be seen in both manufacturing and service sectors, though the latter is the primary concern given the persistent above-zero prints in the IFO survey.
• In the ECB July meeting press conference, President Lagarde noted that the Governing Council was not yet worried about wage-price spiral dynamics in the Euro area.
• However, with real wages stuck in negative territory for almost 2-years (a Eurozone-wide phenomenon), the risk of second-round effects on inflation resulting from successful wage bargaining in coming months remains.
• The next round of German labour earnings data for Q2 is due 29 August, which will shed more light on whether wage growth follows the employment barometers and cools off, or if the divergence seen this year is set to continue.