Draghi's Cry for Decent Pay Shows ECB Can't Slow Stimulus Yet

  • ECB president worries about low-quality jobs curbing inflation
  • Governing Council takes first small step toward stimulus exit

Mario Draghi.

Photographer: Sean Gallup/Getty Images

Mario Draghi is reminding everyone that the euro-area economy may have turned the corner, but the job market is still far from healthy.

Almost six years into his term, the European Central Bank president was finally able to say on Thursday that the risks to growth are balanced. He even stopped saying that the Governing Council may cut interest rates again. But on inflation -- the ECB’s primary mandate -- he insisted that nothing substantial has changed.

“What needs to be explained is the flat and low profile of underlying inflation. That has to do mostly with subdued nominal wage growth.”

The remarks, accompanied by a cut in the ECB’s inflation forecasts, mean that monetary stimulus could be around for a long time to come. While the Governing Council’s tone provided a ray of light after years of battling to avert deflation, rates remain at a record low and there was no formal discussion on how to taper the 2.3 trillion-euro ($2.6 trillion) bond-buying program, despite two members raising the topic.

Euro-area unemployment is dropping faster than projected, with the rate currently falling at almost 1 percentage point a year and more people joining the workforce. Still, April’s rate of 9.3 percent shows that the economy continues to have economic slack that depresses wage demands and prices -- and Draghi bemoaned the nature of the new jobs.

“We have evidence that many of these new jobs are so-called low-quality jobs, where we’re talking about temporary employment, we’re talking about part-time employment. There are many.”

He also cited the backward-looking nature of wage negotiations, as well as structural economic changes that should be positive in the longer-term. But the ECB is so concerned by the issue of poor pay growth that it published a study last month using a new measure of joblessness counting people who want to work more hours but can’t. That rate is closer to 15 percent.

See also the OECD’s take on wages

Even in Germany, the region’s powerhouse economy with record-low unemployment, wage growth was unspectacular last quarter, coming in at only 0.5 percent according to data published Friday. Next year should bring on “significantly higher” wage agreements as the country’s workers enter renewed negotiations amid faster inflation, the Bundesbank said in a separate report.

The ECB now sees consumer-price growth of only 1.6 percent in 2019, below the goal of just under 2 percent. That’s essentially a consequence of a slide in oil prices, but core inflation has repeatedly failed to hold above 1 percent. Even if it accelerates to 1.7 percent in 2019 as predicted, that’s still not enough, given that the ECB views the rate as a marker for where headline inflation will settle.

Draghi’s downbeat tone on wage growth and inflation bled into his commentary on the Governing Council’s view that it no longer expects it might have to cut interest rates. An expectation, he said, is not the same as a promise.

“If you ask me what I expect, I’d say based on the current assessment, the current information, I don’t expect lower interest rates. If you ask me, ‘but in case things were to worsen are you ready to lower interest rates?’ The answer is yes.”

Draghi is nevertheless confident that higher wages are on the way. His message on Thursday was that the euro area must be patient and persistent, and he stressed that labor-market slack is tightening and the output gap is closing. Inflation will catch up with economic growth, but not just yet.

“The sharp downgrade” in inflation projections should “temper some Governing Council members wishing to exit quickly from QE,” said Christophe Barraud, chief economist at Market Securities in Paris. “All in all, it reinforced the idea that interest rates will only be raised a long time after the end of the asset-purchase program.”

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