Germany's powerful IG Metall industrial union has agreed to a staggered wage deal in the key state of Bavaria, which will see wages in the metals and electrical engineering industries rise 5.6% over the next 20 months. If this serves as a pilot for other German regions, will this be a big game-changer, setting the scene for a German consumer-led recovery as some seem to be claiming in Germany right now?
If the deal in Bavaria succeeds in setting the benchmark for the rest of Germany, it will have positive ramifications for the recovery. A pay rise worth 5.6% over the next 20 months beats inflation and substantiates the rising trend of real wages in Germany. It will boost consumer confidence especially as it is backed up by a reasonably strong labour market at the moment. Whether it is going to be the saving grace for sustainable economic recovery is a different question. German consumers tend to be perennially cautious and the propensity to save in uncertain times tends to dominate thinking. The GfK consumer sentiment index has risen to a 5-year high, but optimism is still relatively flat and flaccid compared to previous upturns. The IG Metall deal will help, but the odds for a substantive consumer-led recovery at this juncture are not overwhelming.
For the time being, Germany has to rely on its age-old, time-tested export-led recovery at this stage. That model tends to be driven by faster exports, feeding into stronger output and investment intentions, with stronger employment and consumer spending bringing up the rear. Nothing changes the picture this time around. Germany might have been spared recession in the current round, but the economy is not out of danger yet. Consumers will do their bit in the recovery process, but it will be the general health of the world economy and the Eurozone and the impact on German exports which will still carry the whiphand
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