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The Potential Impact of Higher Wage Settlements on Germany's Trade Balance

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The Potential Impact of Higher Wage Settlements on Germany's Trade Balance

Important wage negotiations have been taking place in Germany in the private and public sectors since the beginning of the year. Higher wage settlements could meaningfully increase real disposable income growth in the largest economy of the eurozone. In turn, higher labor costs could increase household consumption, and therefore demand for foreign products, which would be great news for Germany's neighbors. They could also have significant implications for Germany's export competitiveness.

However, a closer look at recent wage trends reveals that higher German wage settlements, often exceeding labor productivity growth, are not a recent event, and trace back to 2012 and 2013. Plus, pay increases have somewhat diverged across sectors, with the highest ones negotiated in domestically oriented industries--good news for companies importing into Germany. So far, the more modest increases in export-oriented sectors have had no impact on the country's foreign competitiveness, as demonstrated by the rise in Germany's foreign market share since 2013. But this could change as wage agreements in the metal industry in particular point to a faster rise in labor costs.

Key Takeaways

  • Germany is to see a considerable increase in wages over the next two years resulting from major wage agreements, increases in sectoral minimum wages, as well as wage pressure due to record low unemployment.
  • Over the past years, wages increased in domestically oriented sectors only, with wage growth remaining slightly below labor productivity growth in the export-oriented manufacturing sector.
  • Wage increases will boost private consumption and demand for imports. However, higher wages in the manufacturing sector could weigh on the competitiveness of German exports. Solid global demand and Germany's reputation for quality should nevertheless outweigh a negative cost impact on exports in the medium term.
  • With imports growing faster than exports in coming years, Germany's trade balance should decline from 2019, thus helping to bring down the current account.

Three Factors Underpin Faster Wage Growth This Year And The Next

Three factors should support faster wage growth in 2018 and 2019:

  • First, some negotiations have recently already led to a generous agreement that could influence other negotiations this year.
  • Second, the government has agreed to further increases in sectoral minimum wages. For example, the minimum wage in the care sector increased by 3.9% starting in 2018, while auxiliary workers in the construction sector have seen a 4% increase.
  • Third, in the context of a strong economy with record low unemployment (3.5% at the beginning of this year) we expect considerable wage pressure in sectors not covered by wage agreements on the back of labor shortages.

Those factors are likely to boost wage growth substantially over this year and the next. However, it's important to note that more generous increases have been agreed for some time now: Indeed, hourly wages and salaries have increased by more than 40% since 2011. In addition, wage growth has substantially exceeded labor productivity growth since second-quarter 2011. As a result, German unit labor costs have been on a much steeper slope over the past seven years than in other eurozone countries.