What about the risk of a wage-price spiral?
The labour market remains tight in the eurozone. The last data show that the eurozone unemployment was at 6.5 percent in November 2022 and at 6.0 percent in the European Union. Within the EU, Spain scores the highest official unemployment rate (12.4 percent) and Germany and Poland the lowest one (3.0 percent). In a working paper published in mid-January, ECB economists pointed out the risk of high wage growth in the coming quarters – way above historical patterns: “This reflects robust labour markets that so far have not been substantially affected by the slowing of the economy, increases in national minimum wages and some catch-up between wages and high rates of inflation.” We tend to disagree with this assessment. Wage growth is of course fuelling inflation in the CEE area, but this is clearly not the case in Western Europe. The likelihood that wages will increase significantly, thus becoming an issue in regards to the fight against inflation, is rather low in our view. Actually, in several countries, wage increases are dramatically lagging behind inflation. In Spain, the average real wage is now below what it was 15 years ago! It is hard to think there will be a wage-price spiral. However, if the ECB believes this is a material risk, they could decide to tighten too much – thus increasing credit stress.
Overall, we believe the consensus was and is still too pessimistic about the eurozone 2023 GDP growth. There is a high probability that a recession will be avoided. That being said, Europe is still broken. The energy crisis remains a major risk for the next winter – with the EU being still reluctant to embrace nuclear energy and being unable to move fast on the project of a reform of the electricity market. While the ECB expects wages to increase substantially, we see that workers are in fact becoming poorer in most countries. Several companies which have benefited from the abnormal negative interest rate periods will now face a moment of truth – many of them will probably go bankrupt. Politically, we are not optimistic. EU presidencies offer little ambition – Sweden, which heads the Council of EU unsurprisingly focuses on the Ukraine war while the Spanish presidency in the second half of 2023 will be dominated by elections in the country. There is not much positive to expect from politics this year.