The Fundamentals Why German wage hikes could please Trump

Thanks to a booming economy, German workers are pushing for big pay rises. If granted, they could affect everything from corporate profits to the trade surplus and monetary policy – and delight the US president.
Give me a trade surplus that's only this big.

German unions are ramping up the pressure on employers to pay big wage hikes this year, and as the economy is booming, companies will find it tough to argue for restraint. With order books brimming and unemployment in Germany last year hitting its lowest level since unification in 1990, employees in several major industries will campaign for a piece of the pie in 2018.

Leading the way are staff at VW’s sports-car brand Porsche, who on Thursday staged a walk out in support of a campaign by the country’s biggest union, IG Metall, for a 6 percent pay hike for some 3.9 million workers in the auto and engineering industries. The union set a high benchmark with its claim, and the chemical industry will likely be confronted with a hefty demand when talks get underway this summer. Pay negotiations are also scheduled for the public sector and construction workers.

“Wages haven’t developed badly of late,” said Enzo Weber, an economist at the Institute for Employment Research, a unit of the Federal Labor Office. “But if you consider how strongly employment has grown and unemployment has fallen, more hikes are feasible.”

Rising wages could hit another economic variable criticized by Donald Trump: Germany’s wide trade surplus.

Wages have been outpacing consumer prices since 2014. Last year they rose by 2.3 percent including bonus payments, which was the strongest increase in three years and above the country's inflation rate of 1.8 percent. The Ifo economic research institute expects wage growth to accelerate to 3.4 percent in 2018 and 3.5 percent in 2019.

Salary changes affect corporate profitability and the competitiveness of Germany’s economy, the largest in Europe. If labor productivity is stable, higher wages tend to depress companies’ profit margins or trigger price increases, making German cars and machinery less attractive. Citing higher wages, the Ifo institute predicts German consumer prices will rise 2.2 percent in 2020. The country's central bank, the Bundesbank, is forecasting an inflation rate of 1.9 percent in two years’ time.

04 p09 Wages and economic power-01

As the biggest hitter in the 19-nation euro zone, Germany’s consumer price changes influence the European Central Bank's monetary policy. Higher German prices boost the average for the whole currency bloc and help the ECB reach its goal of an inflation rate of “below, but close to, 2 percent over the medium term.” Approaching the target could persuade the ECB to adjust its monetary policy, for instance by winding down its bond-buying program more quickly or raising interest rates.

Rising wages could also hit another economic variable, one much criticized by Donald Trump: Germany’s wide trade surplus. The US president complained last year that there were too many BMWs on American roads and that the US had a "massive" trade deficit with Germany. Although many factors affect the sum of exports and imports, if higher labor costs boost prices and German products become less attractive to foreign buyers, the surplus could fall. Rising wages could also increase demand for foreign goods, cutting the surplus even further.

The Bundesbank, citing substantial domestic demand, indeed expects Germany’s trade surplus to drop slightly from 8 percent of economic output this year to 7.7 percent in 2019. Although still high, it’s a move Mr. Trump would welcome.

Gilbert Kreijger is an editor with Handelsblatt Global. Frank Specht writes about the jobs market and labor unions from Handelsblatt's Berlin office. To contact the authors: [email protected] and [email protected]