Labor costs/Inflation Outlook in Europe
3.3 LABOUR COST INDICATORS
Available data on most labour cost indicators for the third quarter of 2003 further support the assessment that wage growth has levelled off since the beginning of 2002 (see Chart 18). The annual rates of change in euro area compensation per employee, total hourly labour costs(in the non-agricultural business sector) and gross monthly earnings all declined as compared with the second quarter, while the indicator on negotiated wages showed a slight increase (see Table 5). A longer-term comparison, such as the average growth rates during the first three quarters of 2003 relative to the average increases in 2002, also confirms that wage developments have stabilised. As a result of the increase in productivity growth and the decline in compensation per employee growth between the second and third quarters of 2003, the annual rate of change in unit labour costs fell. This was the first decline in unit labour cost growth since the end of 2002, when it had started to increase as a result of a cyclical downturn in productivity growth. Notwithstanding this decline, unit labour cost growth is still relatively high compared with its average since the mid-1990s.
3.4 THE OUTLOOK FOR INFLATION
Taking account of these latest developments and assuming that there are no further price shocks, euro area HICP inflation is expected to fall below 2% in the course of 2004 and remain at levels in line with price stability thereafter. The short-term picture, however, remains subject to considerable uncertainty, in part related to the impact on prices of fiscal measures due to be implemented in early 2004. Over a slightly longer horizon, inflationary pressure should remain limited. This assessment is based on the assumption of moderate wage increases and a passthrough of subdued import price developments to consumer prices.
Most recent information on inflation expectations from other institutions seems to support the view that price pressures will diminish over the next two years. For instance, the most recent Survey of Professional Forecasters (SPF), conducted in late January, puts HICP inflation at 1.8% and 1.7% in 2004 and 2005 respectively (see Box 3). In addition, results from Consensus
Forecasts and Euro Zone Barometer in January show that euro area inflation is expected to stand at 1.7% in both 2004 and 2005.
Inflation expectations for 2004 and 2005
Survey participants have revised HICP inflation expectations for 2004 upwards compared with the previous (2003 Q4) SPF. HICP inflation is now expected to stand at 1.8% in 2004, i.e. a 0.2 percentage point upward revision from the previous SPF. HICP inflation expectations for
2005 have been revised downwards slightly compared with the previous SPF. They now stand at 1.7%, i.e. a downward revision of 0.1 percentage point. The upward revision for 2004, despite the appreciation of the euro, is mainly driven by indirect tax and administered price changes.
The unemployment rate in the euro area is expected to stand at 8.8% in 2004, a slight downward revision as compared with the last SPF round. This revision reflects the fact that unemployment did not rise as much as expected during the last slowdown and the fact that expectations for GDP growth have been revised upwards slightly. However, the recovery in 2004 is not expected to be strong enough to produce a noticeable improvement in the euro area unemployment rate until 2005, when that rate is expected to fall to 8.5%. The optimism shown by respondents regarding long-term developments, i.e. a decline to 7.4% in the unemployment rate in 2008, is explicitly linked to the implementation of further labour market reforms.
UNEMPLOYMENT
There were still no clear signs of an improvement in labour markets in December. The standardised unemployment rate for December was 8.8%, unchanged since March 2003 (see Chart 23). The unemployment rate also remained unchanged as regards gender groups. In terms of the age breakdown, the unemployment rate of those below 25 declined slightly in December, to 16.6%, while it remained unchanged for those aged 25 and above. The seasonally adjusted number of unemployed decreased by approximately 15,000 persons in December month on month, but increased by about 270,000 persons compared with December 2002.
Employment continued to contract in industry in the third quarter of 2003, by 0.6% quarter on quarter, and in particular in the construction sector, while it continued to expand at a rate of 0.2% in the services sector.
Despite some modest improvements, survey data continue to suggest that labour market developments are likely to remain subdued. As regards the manufacturing sector, both
the European Commission’s indicator of employment expectations and the employment index in the PMI have improved slightly since mid-2003 but remained at relatively low levels. The employment index in the PMI in January
2004 still fell short of the threshold of 50 that indicates zero employment growth. In the services sector, the European Commission’s indicator of employment expectations and the employment index in the PMI have also risen
only moderately since mid-2003, and even declined somewhat recently.
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