Wage inflation is double-edged. Too much of it can undermine price stability, employment and international competitiveness. Too little hobbles household spending power and domestic demand. After years of excessive wage restraint, Germany is now getting the balance just right.
In the first quarter, real wages were 2.5 per cent higher than a year earlier, the highest increase since the start of the data series in 2008. A new national minimum wage, an increasing shortage of skilled workers and palpable pay hikes in the public and private sector all contributed. Nominal labour costs for employers rose by 3.2 per cent, driven by higher payroll taxes.
The trend got going in 2011. Ever since, Germany's labour costs have risen faster than those of the overall euro zone. And the higher pay packets are already working. The era of feeble domestic demand and an over-reliance on export-led growth is over. In 2015 and 2016, almost all GDP growth will be generated internally, the IMK economic think tank forecasts. Imports, seen up 6.5 per cent this year and 8.2 per cent next, will outstrip exports.
For the rest of the euro zone - Germany's biggest trading partner - stronger German imports and subdued export growth are simply good. But some German economists see a national downside, reduced competitiveness.
They can point to hourly average manufacturing wage costs of €37. That is the second-highest rate in the euro area, after Belgium's €43.20, and 17 per cent above the currency zone's average, data from the national statistical office shows. However, labour productivity is high and rising. Besides, most German exporters compete more on quality than on price.
In any case, runaway wage inflation is not on the horizon. Commerzbank just scaled down its German labour cost forecasts by one percentage point to around three per cent per year in both 2015 and 2016. Unit labour costs are seen up between 1.7 per cent and 2 per cent. That pace gives employers enough time to adjust and workers enough money to increase spending meaningfully. For wage inflation, Europe's biggest economy has the best of both worlds.
