German wages rise at record pace in second quarter

Receive free German economy updates

We’ll send you a myFT Daily Digest email rounding up the latest German economy news every morning.

German wages rose at a record annual pace of 6.6 per cent in the second quarter, boosting consumer spending power but fuelling concerns about inflation being pushed up by rising labour costs.

The increase, which compared with wage growth of 5.6 per cent in the previous quarter, was the highest since collection of the data began in 2008. 

It took German annual wage growth above the country’s consumer price inflation rate — 6.5 per cent in the period — for the first time since 2021.

“Real wages have declined for three years. Now they are at least stagnant,” said Enzo Weber, head of research at the Institute for Employment Research in Nuremberg.

The figures raise hopes that a rebound in German consumer spending could support the country’s economy, which has shrunk or stagnated for the past three quarters, as household incomes start to catch up with the cost of living.

“For the economy it is good news as we need some degree of catch-up in wage growth to support the consumption recovery,” said Oliver Rakau, an economist at consultant Oxford Economics. “While real wages are finally turning positive, they remain well below pre-pandemic trends.”

Second-quarter pay for German workers was boosted by increases in the minimum wage and one-off bonuses awarded by many companies to cushion the impact of higher inflation, according to the federal statistical office. 

The lowest paid fifth of the workforce enjoyed the highest wage rises, as their pay rose 11.8 per cent following last October’s increase in the minimum wage to €12 an hour. The maximum monthly earnings for tax-free, part-time “mini” jobs also rose from €450 to €520.

The fastest wage growth was in sectors hit hardest by the pandemic, rising 12.6 per cent for hospitality workers, 11.9 per cent in the arts, entertainment and recreation sectors and 10 per cent in transport and warehousing.

The figures could increase concern among European Central Bank policymakers about the risk of a wage-price spiral, in which high inflation pushes up labour costs and so feeds more price pressures. This could tip the balance in favour of a 10th consecutive rate rise at the ECB governing council’s next meeting on September 14, analysts say.

Melanie Debono, an economist at consultant Pantheon Macroeconomics, said Germany’s wage growth “will definitely push the ECB towards a September rate hike”.

However, many of the factors behind the rise in German wages were “one-time events”, such as the increase in the minimum wage and bonuses, Weber said, adding: “This is not enough for a wage-price spiral.”

The GfK market research group said on Tuesday that its German consumer confidence index fell from minus 24.6 to minus 25.5 this month as people’s income expectations declined. Despite rebounding from record lows during last autumn’s energy crisis, the index remains well below consistently positive pre-pandemic levels. 

The ECB has predicted companies will absorb the cost of higher wages by reducing profit margins. Dirk Schumacher, an economist at French bank Natixis, said this looked likely, adding: “Weak consumption will in fact imply that corporate margins will absorb some of this.”