Eurozone employment declines as wage growth surges, complicating ECB's inflation goals

Economy MARKET_WATCH

The Eurozone is experiencing an unexpected slowdown in its labor market, with today's Purchasing Managers' Index (PMI) revealing the first drop in the employment subindex in years. This development presents a challenge to the European Central Bank's (ECB) efforts to achieve its inflation targets.

Today's PMIs have highlighted a softening in the Eurozone labor market, with the employment subindex falling for the first time after a prolonged period of growth. This deceleration introduces uncertainty into the ECB's projections for curbing inflation.

Despite this setback, service sectors across the Eurozone are grappling with high input costs, driven in large part by rising wages. The European Commission's (EC) services surveys still reflect positive hiring sentiments, and wage growth remains robust. According to the ECB's negotiated wages tracker, there was a significant increase of 4.7% in the third quarter. Additionally, the Indeed.com Wage Tracker reported a notable year-over-year wage increase of 3.8% for October.

In response to these mixed signals, Bloomberg reported remarks from Governor Pierre Wunsch of the National Bank of Belgium, published in Boersen-Zeitung today, stating that interest rates are expected to stay unchanged even if minor recessions occur, provided that wage growth maintains its current pace of around five percent. These wage dynamics present a stark contrast to ECB Chief Economist Philip Lane's assessment from May 2022, where nominal wage increases were deemed compatible with a two percent inflation target assuming one percent productivity growth. The current situation reflects a disruption of this balance due to elevated wage hikes combined with lagging productivity.

The evolving economic landscape within the Eurozone suggests complex interactions between employment trends, wage growth, and inflationary pressures that will likely influence future monetary policy decisions by the ECB.

Source : Investing.com / Nov 24, 2023

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