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Aline Schuiling, senior economist at ABN AMRO, points out that the Eurozone’s growth in labour costs weakened in 2018Q4 and is expected to continue to fall.

Key Quotes

“Eurostat published its report on labour costs in 2018Q4 yesterday. It showed that the rise in total labour costs slowed to 2.3% yoy in 2018Q4, down from 2.5% in 2018Q3. Wage growth stabilised at 2.3%, while the rise in non-wage labour costs slowed to 2.4% from 2.9%. The slowdown in non-wage costs reflects changes in government policy, such as cuts in social contributions and labour taxes paid by employers.”

“Looking at the details of the part of labour costs that does reflect labour market conditions, it turns out that wage growth in industry slowed from 2.1%to 1.9%.”

“Looking ahead, we think the decline in wage growth has further to go. The eurozone economy has grown at or below its trend rate since the first quarter of 2018 and we expect growth to remain subdued throughout this year (we expect GDP to grow by merely 0.8% over the year as a whole). This means that employment growth will probably be modest this year and that unemployment will roughly stabilise in the eurozone as a whole, and probably rise in some individual countries.”

“To conclude, we expect inflationary pressures stemming from the labour market to ease further this year, implying that core inflation will remain close to its current level of around 1% this year, and will pick up slowly to around 1.2% on average in 2020. This is below the ECB’s forecasts of 1.2% and 1.4%, respectively.”