Pay hikes highlight German shift towards consumption

German unions have reached an inflation-busting pay hike deal for more than 2 million public sector workers that could push up prices and boost a consumer-led upswing in Europe’s biggest economy.
The deal sealed last week is part of a broader, gradual shift in Germany’s economy in which private consumption has overtaken exports as the main growth driver, making the recovery more resilient to external shocks.
The complex wage agreement gives public sector workers a 3.2 per cent pay raise backdated to March 1, followed by a 3.1 per cent increase from April 2019. In a third stage, wages will rise by a further 1 per cent from March 2020.
With inflation projected to stay well below 2 per cent this year and next, the agreement also means in real terms that workers have more money to splash out.
“It is the best result in many years,” Verdi union chief Frank Bsirske told reporters in the town of Potsdam near Berlin.
Thorsten Schulten, wage expert at the WSI institute, called the agreement a “strong deal” with pay hikes clearly above the levels seen in previous years.
It comes in the wake of an unusually high pay hike reached in February for 3.9 million workers in the industrial sector, amounting to a roughly 4 per cent annual rise for 2018 and 2019.
Record-low unemployment and unprecedented shortages of skilled labour in many sectors have led German employers to give up years of wage restraint.
“The time of ultra-low wage settlements is clearly behind us. Above all, this reflects how Germany is slowly reaching full employment,” Commerzbank economist Joerg Kraemer said.
The European Central Bank is keeping a close eye on German wage negotiations for any sign that wage growth is picking up, potentially helping lift inflation and giving the euro zone’s central bank added leeway to start winding down its massive stimulus programme.
Salary growth has been missing despite a brisk expansion in the euro zone economy over the past year, largely fuelled by the central bank’s easy money and by a booming global economy.
The German wage deal is likely to bolster the ECB’s confidence that salaries in the bloc’s largest economy are finally picking up, paving the ground for a long-awaited recovery in inflation.
This would strengthen the ECB’s hand as it prepares to close the money taps after three years of aggressive stimulus.
“This is good for Germany and the euro zone and obviously reduces the headache in the towers of the ECB in Frankfurt,” said Florian Hense, an economist at Berenberg Bank. — Reuters