(Bloomberg) -- A sharp increase in worker compensation will help the European Central Bank justify raising interest rates in early 2023, according to economists at ING Group.
While there are no signs that soaring inflation has fed through to pay yet, labor shortages, robust corporate profits and higher minimum wages will contribute to growth of about 3.5% this year and next, Bert Colijn and Carsten Brzeski said Thursday.
In a report to clients, the analysts argue that Europe’s economy has healed more quickly than anticipated from its pandemic slump, boosting the jobs market.
With hiring expectations strong and vacancies high, “it looks as if labor shortages are set to remain a dominant economic theme of 2022,” they said. What’s more, elevated consumer-price gains -- currently running at 5% -- will empower union demands.
ING found that wage growth trails inflation by about half a year, while corporate profits, which have been “healthy” since economies reopened in mid-2020, historically feed through to pay with a five-quarter lag.
“It’s very early days, but it looks like the relationship between unemployment and inflation is becoming more significant again,” Colijn and Brzeski said. “For the ECB, this will be an important argument for a rate hike in early 2023.”
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