Monday, 16 January 2017

Draghi’s Inflation Upturn Reopens Divergences Across Region

In World Economy News 14/01/2017

As Mario Draghi’s price-boosting policies start to hit home, the euro area’s 340 million people are about to find out that inflation won’t have the same effect everywhere.
The European Central Bank president has introduced wave after wave of stimulus in recent years to fuel price growth, which last month picked up to the highest in more than three years. The 19 nations are likely to find that triggers tougher pay demands in countries with tight labor markets, while those still dealing with the unemployment hangover from the recession could see their spending power dented.
That could drag on a consumer-led recovery that has been driven by cheap energy, loose monetary policy and easier financing conditions. Households and businesses will have to take comfort from the fact that inflation is unlikely to surge out of control, meaning the ECB’s low interest rates and asset purchases will remain in place for some time.
“The new upward trend in inflation is likely to affect wage dynamics in the medium term — though differently across members,” said Maxime Sbaihi, an economist at Bloomberg Intelligence in London. “In Germany, unions are already taking it into account to demand significant pay rises. Quite the contrary is happening in Spain, where high unemployment puts employees in a much weaker position.”
The two economies are a case in point when it comes to divergences in the euro area.
On the surface, both are growing strongly, driven by domestic spending as net trade drags on output. Germany expanded 1.9 percent last year while Spain’s gross domestic product probably increased 3.3 percent.
After that, their stories change. Employment in Europe’s largest economy is at a record and joblessness is running at less than half the euro area’s 9.8 percent. Spain’s unemployment rate — while better than its crisis peak — is still about 19 percent.
Union Demands

With German inflation at 1.7 percent, trade unions have a platform to demand higher wages. Ver.di will start wage talks this month and is asking for a 6 percent raise for about 1 million public-sector workers. Unions representing employees in the energy, food and textile industries have put in demands for at least 4.5 percent.
Such increases would produce the kind of second-round effects for which Draghi and his colleagues have been striving. The ECB, in the record of its last policy meeting, noted there is scope for a healthier jobs market to feed into pay demands.
“The wage bargaining process had been quite subdued so far but this might change once workers realized that real wages were not increasing, or were even decreasing,” the account, published Thursday, showed. “Labor-market developments in the euro area might continue to be more dynamic than expected, given recurrent positive surprises.”
Not Much Scope

Inflation in the euro area was 1.1 percent in December, with the core rate at 0.9 percent. The ECB aims for price growth of just under 2 percent, and Governing Council member Francois Villeroy de Galhau said late Thursday that the goal remains a way off.
“Some people seem to be worried about a return of inflation,” he said in his new year’s address to financial executives in Paris. “That’s greatly exaggerated.”
Even so, as prices edge higher, workers in nations still plagued with high unemployment may not have much scope to ask for more pay to compensate for rising costs.
Inflation in Spain shot up to 1.4 percent last month according to final data released Friday by the nation’s statistics office, while the average salary agreed in collective bargaining in 2016 only rose 1.06 percent, according to government data. Core inflation accelerated to 1 percent, the release showed. Similarly, workers in Italy and Greece, with 12 percent and 23 percent unemployed, may also find themselves in a weak bargaining position.
Euro-area household spending won’t go unaffected, with the rate of growth set to slip to 1.4 percent from 1.6 percent in 2016, according to forecasts compiled by Bloomberg. Overall economic growth may also cool to 1.4 percent.
“Low inflation has helped the consumer recovery gain traction over the past year, feeding through cheaper energy costs,” said Ben May, euro-zone economist at Oxford Economics. “Higher inflation removes some of that.”

Source: Bloomberg