A crucial indicator of wage growth across the eurozone has shown signs of slowing, offering European Central Bank (ECB) officials the reassurance needed to move forward with anticipated interest rate cuts next week.
According to calculations by Bloomberg Economics, based on data from Eurostat, compensation per employee in the second quarter increased by 4.3%, a decline from the 4.8% growth recorded in the first quarter of this year. This compares to the ECB’s June forecast, which predicted a wage growth of 5.1% for this period. These figures arrive just ahead of the ECB’s decision on rates next Thursday, which could see a reduction if inflation trends continue to soften. A Bloomberg survey suggests borrowing costs could be reduced quarterly until they reach 2.5%.
Rising wages across Europe have been driven by workers seeking to offset higher living costs. For the ECB, this has been a critical concern, as sustained wage increases can keep inflation elevated, especially in the services sector, where labor costs significantly impact pricing.
While overall inflation has moderated in recent months, wage-related pressures in the services sector have been more persistent. Still, recent data offers encouraging signs of a slowdown in negotiated wages in the last quarter, helping to reduce concerns about prolonged inflationary pressures.
One key factor in the volatility of wage growth data has been Germany, where many workers received substantial one-time payments earlier this year to counter inflation. ECB Executive Board member Isabel Schnabel has warned that wage growth may accelerate again in the third quarter, adding caution to the ECB’s forward outlook.
However, ECB Chief Economist Philip Lane noted last week that wage gains are projected to slow sharply in 2025 and 2026, boosting confidence that inflation will ease toward the central bank’s 2% target by next year.
In addition to wage growth, ECB officials are closely monitoring corporate profits and labor productivity to assess the broader inflationary picture. Productivity continued to decline in the second quarter, an issue that policymakers are increasingly highlighting as a potential drag on growth. On the positive side, corporate profits helped to reduce domestic price pressures during the first quarter, and that trend intensified in the second quarter, according to Bloomberg Economics. This provides further evidence that businesses are absorbing rising labor costs rather than passing them on to consumers.
“We are not witnessing the ‘tit-for-tat’ risk that ECB President Christine Lagarde previously flagged as a concern,” said Piet Haines Christiansen, an economist at Danske Bank. “Today’s data supports the ongoing disinflationary trend in the eurozone, though the ECB is likely to remain cautious about signaling an aggressive rate-cutting cycle next week.”
In parallel, separate data published Friday showed that the eurozone’s gross domestic product (GDP) grew by 0.2% in the second quarter, a revision down from the earlier estimate of 0.3%. This slower growth adds to the case for more accommodative monetary policy as the ECB seeks to balance inflation control with economic support.
Analysis:
For investors and market participants, the ECB’s decision on interest rates presents both risk and opportunity. If the central bank moves forward with its expected rate cuts, it could ease borrowing costs across the eurozone, providing relief to businesses and consumers. This could fuel growth in sectors like real estate and consumer goods, as lower rates make credit more affordable.
However, the risk of continued wage pressures remains, particularly if labor markets remain tight and productivity continues to lag. Investors should keep an eye on further wage data and corporate earnings reports, as these will provide critical insights into whether inflation can indeed be tamed over the next year.
For traders, a rate cut could spark volatility in bond markets, with yields potentially declining further. Those with exposure to eurozone debt should assess the impact of shifting interest rates on their portfolios, while equity investors might find opportunities in sectors that benefit from lower borrowing costs, such as technology and industrial
