Slow wage growth underscores need for policy support

The latest labour market data paint a positive picture of employment conditions in the euro-zone. Indeed, in Q1 the level of euro-zone employment finally surpassed its pre-crisis peak. What’s more, growth picked up – both quarterly and annual growth were the fastest since 2008. But the improving labour market has not yet fed through to much stronger wage growth. In Q1, annual hourly labour costs growth was unchanged at just 1.5%. So wage growth is still far too slow to justify monetary policy normalisation. And even by next year, we think that pay growth will be inconsistent with the ECB’s target of below, but close to, 2% inflation.