German Bundesbank Sees Conditions for ‘Noticeably Stronger Wage Agreements’

21 February 2022

By David Barwick – FRANKFURT (Econostream) – Positive macroeconomic developments and elevated inflation could lead to relatively robust outcomes of wage negotiations this year, the German Bundesbank indicated on Monday in its latest monthly report.

The Bundesbank said that upside price pressure would stay high over the next months in part because of high intermediate inflation rates and strong demand.

‘In this year's small round of collective bargaining for about 8 million workers, the favourable macroeconomic outlook, increasing labour market shortages and high inflation rates could contribute to noticeably stronger wage agreements’, the German central bank warned.

Moreover, government plans to hike the minimum wage to €12 an hour as of October ‘would noticeably raise earnings in the lower pay groups and also have a noticeable effect on the wage segments above these’, the Bundesbank said. ‘This should increase the upward pressure on aggregate wages.’

History suggests that the impact would likely be ‘manageable’, the Bundesbank said. ‘However, it cannot be ruled out that, in the current environment of very high inflation rates, a stronger pass-through of wages to prices cannot be ruled out.’

Turning to economic growth, the central bank predicted that 1Q GDP would again ‘decline noticeably’, which it attributed to the flare-up of the pandemic. This would not only hold back the service sector, but the resulting absenteeism due to illness ‘could also dampen economic performance noticeably’ more generally.

‘Nevertheless, positive impulses can be expected from industry’, the Bundesbank said. ‘There are signs of a further easing of supply bottlenecks here, and demand for industrial products remains high. In view of the very good demand situation, GDP should pick up again strongly in the spring, provided the pandemic event subsides and the supply bottlenecks continue to ease.’

The Bundesbank said the 1Q dent in labour market developments would be ‘comparatively mild’ notwithstanding widespread Covid-19 infections.