Sharp slowdown in wage growth boosts ECB rate cut hopes

A marked slowdown in wage growth might just be the signal the European Central Bank needs to go ahead with an interest rate cut, despite a flattering short-term boost to the economy from the Olympic Games.
Wage rises under negotiated settlements, made collectively between employers and trade unions, averaged 3.6 percent between April and June, data published Thursday by the ECB showed. That was the slowest increase since the end of 2022 and was down from 4.7 percent in the first three months of the year. These contracts cover about three-quarter of all workers in the eurozone.
“The trend looks just fine,” said Pictet Wealth Management economist Frederik Ducrozet via X. “The ECB should lose no time in dialling back its restrictive stance.”
Markets are certain that Frankfurt will cut rates at its next meeting in September, with a minority of participants even willing to bet on an extra-large half-point cut, something usually reserved for crisis periods. By December, overall expectations are that the ECB’s deposit rate will be at only 3 percent, from 3.75 percent currently.
Other recent weak economic numbers have bolstered that case: on Wednesday, Eurostat said vacancies — a key measure of demand for labor — fell in the second quarter, while the growth in firms’ overall labor costs also slowed. And earlier Thursday, a key business survey pointed to an ongoing crisis in the region’s manufacturing sector, especially in Germany. 
S&P Global’s manufacturing purchasing managers index, a real-time gauge of activity, fell back to 45.6 in August, according to the flash estimate published on Thursday. That’s the lowest since January and well below the 50 level that typically separates growth from contraction. New orders and backlogs continued to fall, while there was broad stagnation in staffing levels and a further decline in overall business sentiment.
“Eurozone manufacturing continues to resemble Germany’s performance at the Olympics: a big disappointment,” said ING economist Bert Colijn.
Deutsche Bank’s Robin Winkler was even blunter. 
“The German economy has completely run out of steam over the summer,” he said. “The question for the rest of the year is no longer when the recovery will come, but whether a renewed recession can be avoided. It will probably amount to a year of stagnation.”
According to a summary released on Thursday, the ECB’s Governing Council was already concerned at its July meeting that the slump in manufacturing might be more than just temporary, and might reflect “a more lasting and structural loss of competitiveness.” 
German underperformance has been a feature of the eurozone economy all year. Data for the second quarter, released over recent weeks, showed GDP growing much faster in service-dominated economies such as Spain and Italy. The Paris Olympics ensured that the French service sector, too, had a buoyant August: its PMI surged to a two-year high of 55.0, well above forecasts. That drove S&P’s composite index for the eurozone to a three-month high of 51.2 in August, from 50.2 in July.
“It should be emphasized that August is likely an outlier due to the Olympic Games,” said Norman Liebke, an economist with the index sponsor Hamburg Commercial Bank (HCOB). “The one-off nature of this boost is evident in the worsening employment situation, weaker output expectations and declining backlogs of work.”
S&P’s surveys also showed input prices at the producer level falling to their lowest in eight months, a sign of reluctance to build stockpiles of stuff that can’t be sold. 
But if all that points the central bank in the direction of easing policy in September, the outlook thereafter is still subject to some risks, said Colijn. 
 “The road to wage moderation could be bumpy,” Colijn said, pointing to the fact that German unions are still able to press for some punchy wage settlements. 
In its latest forecasts published in June, the ECB said it expects negotiated wage growth to increase slightly this year before easing gradually next year. According to data from its forward-looking wage tracker, growth should still be at around 4.8 percent at the end of this year.
(This article has been updated to include details of the PMI surveys and analyst comment.)