German wage deal could boost consumer-driven growth

By Reuters

Feb 24, 2015 04:47 AM EST

An inflation-busting wage deal for Germany's biggest labor union agreed on Tuesday looks set to boost household spending this year after consumer activity propelled strong growth in Europe's largest economy at the end of 2014.

With record-high employment and rising wages, consumers are providing the main impetus for a traditionally export-reliant economy. Private consumption grew by 0.8 percent in the fourth quarter of 2014, matching its sharpest rises in three years.

Germany is under pressure to increase wages and invest more to help reduce economic imbalances and boost the flagging euro zone economy. Fourth-quarter gross domestic product (GDP) data suggested this is starting to happen.

The Statistics Office confirmed an earlier flash estimate that the economy grew 0.7 percent at the end of last year.

"That sets us up really well for this year and it means that the prospects for a solid 2015 growth rate are good," said BayernLB economist Stefan Kipar, adding that he expected 1.7 percent growth this year but it could be closer to 2 percent.

Robust end-year growth came after Germany narrowly avoided a recession in the middle of 2014 because of weakness in the euro zone and uncertainty stemming from the Ukraine crisis.

Domestic demand contributed 0.5 percentage points to growth, gross capital investment 0.2 percentage points and foreign trade 0.2 points. Gross capital investment levels, which plunged in the middle of last year, bounced back to expand 1.2 percent, with plant, equipment and construction spending increasing.

The German government expects the economy, which expanded by 1.6 percent overall last year, to grow by 1.5 percent this year, helped by a weaker euro and lower oil prices.

Consumer morale is at its highest in more than 13 years and after trade union IG Metall agreed on Tuesday to a 3.4 percent wage increase for one year from April for the southwest region, plus a one-off payment of 150 euros, there is no sign of that abating. IG Metall said the deal would help boost consumption.

Agreements in this pilot region traditionally serve as a template for the 3.7 million workers whom the union represents nationwide. The increase is much higher than Germany's 2014 inflation rate of 0.9 percent.

"Today's IG Metall deal suggests that newly negotiated deals may be firm this year and that this will keep negotiated pay overall in the economy at 3 percent," said Greg Fuzesi, an economist at J.P.Morgan.

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