Europe’s biggest private-sector employer Volkswagen has said it is not under pressure to raise salaries, reinforcing central bankers’ forecasts that the region’s economic rebound from the coronavirus pandemic is unlikely to fuel sustained inflation.
“We don’t see signs of wage inflation pressure in our major markets,” Arno Antlitz, VW’s chief financial officer, told the Financial Times. “It is difficult to say from today’s perspective if this will change, but we don’t expect that.”
His comments echo those made earlier this week by the ECB’s chief economist Philip Lane on whether companies will pass higher costs on to consumers. He said: “The fact that pricing power may have been rediscovered by some global firms is not on its own enough to generate persistent inflation — you need a strong labour market.”
Investors are anxious that the massive fiscal and monetary stimulus rolled out on both sides of the Atlantic since the pandemic hit early last year could cause inflation to soar as lockdowns are lifted and the US and European economies rebound. A rise in inflation would erode real-terms bond market returns.
Eurozone inflation turned negative in the final months of last year but rebounded to 1.6 per cent in April. The ECB expects it to top its target of below, but close to, 2 per cent late this year, driven by soaring supply-side price pressures and resurgent consumer demand. The US Federal Reserve also expects US price growth to top its 2 per cent target this year.
However, most economists think these inflationary pressures will fade in 2022 because labour markets will take time to recover from the shock of the pandemic, delaying any significant rise in wages. The ECB forecasts that eurozone inflation will fall back to 1.4 per cent by 2023.
Unemployment in the eurozone has risen from just above 7 per cent before the pandemic to 8.1 per cent in March, but millions of people have dropped out of the workforce and millions more are still on state-subsidised furlough schemes.
Eurozone labour slack, a broader measure of labour market softness which includes involuntary part-timers and discouraged workers, rose to about 16 per cent of the extended labour force in the final quarter of last year, up 2 percentage points from pre-pandemic levels.
Only one in 10 eurozone businesses in both the manufacturing and services sectors reported labour was a factor limiting production according to the latest quarterly survey by the European Commission in April. In contrast, insufficient demand was a concern for more than one in three services providers and 27 per cent of eurozone factories.
“We do think the labour market is going to lag behind the overall recovery and we notice the sectors that have been most hit by the pandemic are quite labour intensive,” said Lane.
VW, which employs more than 660,000 staff worldwide including almost 500,000 in Europe, resisted recent calls from Germany’s most powerful union, IG Metall, for a 4 per cent pay rise. Instead it agreed to a one-off annual 2.3 per cent increase from 2019’s remuneration levels, to take effect next year.
At the time the deal was announced, local union leader Thorsten Gröger said the deal meant that “the VW workforce will find a noticeable plus in their wallets”.
While VW’s labour costs are little changed, it has been hit by sharp increases in the cost of raw materials.
“We feel a lot of pressure on the materials side, steel is one thing, but even more concerning are precious metals . . . aluminium is on the increase,” said chief executive Herbert Diess. “Wherever possible we will pass it on to our customers and we will make sure that the increases will be as low as possible with our purchasing power.”
Additional reporting by Claire Jones and Valentina Romei