Subdued wage pressure likely to keep core inflation low in euro area, says Danske Bank

Wage growth in the euro area remains low despite the continued labour market progress. Nevertheless, consumers have recently benefited from very high real wage growth due to the extraordinarily low inflation.

Looking ahead, the European Central Bank (ECB) expects rising nominal wage growth but even if wages pick up in line with the ECB’s projection, real wage growth is expected to be much lower than in the past three years, putting downward pressure on private consumption growth. Additionally, the ECB’s projection for wage growth is very optimistic.

The factors pointing to low wage growth are different measures of labour market slack, including a high share of underemployed and discouraged workers in periphery countries, low inflation expectations, less impact from higher inflation as negotiated wages are already set and formal wage indexation has declined, lower productivity growth and new jobs being created mainly in sectors where productivity growth is low.

"In our view, subdued wage pressure will keep core inflation low, implying there will not be a sustained adjustment in the inflation path, which the ECB requires in order to tighten its monetary policy," Danske Bank commented in its latest research report.