Wednesday

31st May 2023

EU: Wage-earners will 'bear brunt' of inflation in 2023

  • Economy commissioner Paolo Gentiloni said he was 'proud that the European economy is showing such remarkable resilience' (Photo: European Commission)
Listen to article

The European Commission raised its economic growth forecast on Monday (15 May), saying that lower energy prices and a strong labour market would help the bloc narrowly evade a recession.

The growth outlook for this year is lifted to 1.0 percent in the Spring Economic Forecast for 2023, slightly above the 0.8 percent projected in February.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

  • Unit profits have increased across all euro area countries and sectors but in some countries more than in others (Photo: EU Commission)

"As lower energy prices continue to provide relief to households and firms' budgets, the economic expansion is expected to continue in 2023 and pick up some pace in 2024," economy commissioner Paolo Gentiloni said at a news conference on Monday, adding he was "proud that the European economy is showing such remarkable resilience."

But the onus of being resilient has predominantly been on wage-earners and the public finances which, the report notes, "have taken a large part of the brunt of high imported inflation," while "companies have generally been successful in passing on higher production costs to consumers."

Real wage loss

Despite gas prices dropping to €33 per megawatt-hour, a level not seen since December 2021, inflation for this year has been revised upwards to 5.8 percent on the back of higher prices remaining sticky in other areas of the economy.

Consumer prices (excluding energy and unprocessed food) rose by seven percent in April across the eurozone compared with a year earlier. So while the growth forecast for 2024 was raised to 1.6 percent, up from 1.5 percent, Gentiloni cautioned that inflation will continue to weigh down on people's purchasing power.

Nominal wage growth reached the historically high level of five percent in 2022, compared to a year earlier, but lagged behind the annual inflation rate of 9.2 percent resulting in a significant real loss of household income.

The commission projects further wage loss to occur in 2023, with disposable income at the end of the year projected to be 6.5 percent below 2020 levels, with only a slight increase of 0.5 percent seen in 2024.

Loss of purchasing power is higher for low-income households, who spend a larger proportion of their income on essentials, but no figures were included.

Profits driving inflation

The report confirms earlier reports by the European Central Bank that show corporations have increased their profit margins, further fuelling inflation, even while wages have fallen across the EU.

"The prevalence of cost shocks may have led to higher 'acceptance' by customers of price increases," the report notes, quoting the economist Isabella Weber who, in her recent work, brought what she describes as 'sellers-inflation' to the public consciousness. Therefore the consumers are "less likely to 'punish' a firm by switching to a competitor," the commission concludes.

In 2022, unit profits grew at a record 9.3 percent (year-on-year) in the final quarter. This increase contributed 3.2 percentage points of the 5.8 percent inflation, thus pushing up prices more than wages.

Unit profits have increased across all euro area countries and sectors but in some countries more than in others.

As shown in the graph above, businesses in countries above the line over-corrected profits against inflation more than in other countries, with Spain, Lithuania, Latvia, Luxembourg and Slovenia being notable outliers.

The commission warns that high-profit margins pose a risk to future inflation as it might lead to higher wage demands, entrenching inflation.

"Protracted distributional conflicts could delay the disinflation process," the commission warns, which could "ultimately force central banks to tighten monetary policy more."

However, interest rates, the ECB's primary inflation-fighting tool, targets wages, not profits, making its policies less effective now profits are the dominant driver of inflation while causing collateral damage to other parts of the economy.

Eurozone inflation creeps up ahead of ECB rate decision

The European Central Bank has raised rates repeatedly since July last year to rein in inflation, and analysts expect the bank to raise it once again — although experts are divided on how big the rise should be.

Hawkish ECB rate-rise 'puts energy transition at risk'

The European Central Bank raised interest rates by another 0.5 percent to a 14-year high, and expects to hike rates by another half percent in March. But what does that mean for the green transition?

ECB: eurozone home prices could see 'disorderly' fall

The European Central Bank in its Financial Stability Review warned EU home prices could see a 'disorderly' fall as high mortgage rates are making houses unaffordable for households and unattractive for investors.

Adapting to Southern Europe's 'new normal' — from droughts to floods

Extreme weather events in recent months have worsened agricultural production in southern Europe, prompting concerns for authorities in Portugal, Spain, France and Italy. As countries will likely face dryer conditions, experts urge adaptation measures for the 'new normal'.

PFAS 'forever chemicals' cost society €16 trillion a year

Researchers found that global societal costs of the so-called forever chemicals or PFAS amount to €16 trillion per year. Meanwhile, the bigger producers of these chemicals are also among the ones spending the most to lobby EU policies.

EU: national energy price-spike measures should end this year

"If energy prices increase again and support cannot be fully discontinued, targeted policies to support vulnerable households and companies — rather than wide and less effective support policies — will remain crucial," the commission said in its assessment.

Opinion

EU export credits insure decades of fossil-fuel in Mozambique

European governments are phasing out fossil fuels at home, but continuing their financial support for fossil mega-projects abroad. This is despite the EU agreeing last year to decarbonise export credits — insurance on risky non-EU projects provided with public money.

Latest News

  1. Europe's TV union wooing Lavrov for splashy interview
  2. ECB: eurozone home prices could see 'disorderly' fall
  3. Adapting to Southern Europe's 'new normal' — from droughts to floods
  4. Want to stop forced migration from West Africa? Start by banning bottom trawling
  5. Germany unsure if Orbán fit to be 'EU president'
  6. EU Parliament chief given report on MEP abuse 30 weeks before sanction
  7. EU clashes over protection of workers exposed to asbestos
  8. EU to blacklist nine Russians over jailing of dissident

Stakeholders' Highlights

  1. International Sustainable Finance CentreJoin CEE Sustainable Finance Summit, 15 – 19 May 2023, high-level event for finance & business
  2. ICLEISeven actionable measures to make food procurement in Europe more sustainable
  3. World BankWorld Bank Report Highlights Role of Human Development for a Successful Green Transition in Europe
  4. Nordic Council of MinistersNordic summit to step up the fight against food loss and waste
  5. Nordic Council of MinistersThink-tank: Strengthen co-operation around tech giants’ influence in the Nordics
  6. EFBWWEFBWW calls for the EC to stop exploitation in subcontracting chains

Stakeholders' Highlights

  1. InformaConnecting Expert Industry-Leaders, Top Suppliers, and Inquiring Buyers all in one space - visit Battery Show Europe.
  2. EFBWWEFBWW and FIEC do not agree to any exemptions to mandatory prior notifications in construction
  3. Nordic Council of MinistersNordic and Baltic ways to prevent gender-based violence
  4. Nordic Council of MinistersCSW67: Economic gender equality now! Nordic ways to close the pension gap
  5. Nordic Council of MinistersCSW67: Pushing back the push-back - Nordic solutions to online gender-based violence
  6. Nordic Council of MinistersCSW67: The Nordics are ready to push for gender equality

Join EUobserver

Support quality EU news

Join us