Concerns
Unemployment in the eurozone is falling appreciably, and in the US the unemployment rate has been below the NAIRU for some time now. It is, therefore, no surprise that the Fed and ECB are worried about mounting wage cost pressure. We, however, think these fears are exaggerated.
EMU
Even though collectively-agreed upon wages will rise more rapidly in 2007 than in previous years – above all in Germany – wage drift (less growth in effective wages) and stronger productivity gains are limiting cost pressures. Above all, as EMU labor markets are becoming more flexible, the non-accelerating wage inflation rate of unemployment also continues to decline in the eurozone. But that won't prevent the ECB from tightening further .
US
Admittedly, there is little room for structural relief in the US where the labor market is already flexible. However, cyclical wage cost pressure will decline appreciably in the coming quarters. Almost all indicators show that the US labor market has already peaked and that over the medium term the unemployment rate will rise again above its equilibrium level .
Slowdown
The main reason for this is the continuing GDP slowdown. The housing recession, coupled with production cuts at automakers, suggests that the cyclical low in GDP growth will not appear until the start of 2007 .
Further topics:
- Weekly Comment: Till cycle do us part – EMU decouples from the US .
- US mid-term elections: Democrats gain, protectionism to rise? .
- Data outlook: Solid third quarter in France; Bank of England to tighten next Thursday; US consumers still very confident .
- Market outlook: Consolidation for both bonds and the EUR .
