September 20, 2018 / 9:44 AM / in a month

UPDATE 3-German real wages rise despite higher inflation

* Nominal wages up 2.5 pct in second quarter

* Inflation at its highest in over five years

* Real wages nonetheless up by 0.5 percent

* Chemical sector close to reaching wage deal

* Strong domestic demand drives overall growth (Adds wage negotiations in chemical sector)

By Michael Nienaber

BERLIN, Sept 20 (Reuters) - German real wages rose in the second quarter despite the highest inflation rate in more than five years, data showed on Thursday, suggesting that household spending will continue to drive growth in Europe’s largest economy.

Helped by record-high employment, inflation-busting wage deals and low borrowing costs, household spending has become an important and reliable growth driver, providing a buffer against trade-related risks stemming from rising protectionism.

Nominal wages increased by 2.5 percent from April to June while inflation rose to 2.0 percent year-on-year, leaving a real wage gain of 0.5 percent, the Federal Statistics Office said.

Among the sectors with the highest nominal wage increases were energy supply with 4.5 percent, manufacturing with 4.1 percent and real estate management with 3.7 percent.

“Inflation is expected to fall back below the two-percent mark in the coming months, while wages should continue to rise sharply in the face of strong demand for labour,” Stefan Kipar from BayernLB said.

“Real wages should therefore post bigger gains in the coming quarters which means that consumption will continue to fuel economic growth,” Kipar added.

In the chemical sector, employers and trade unions are currently negotiating a wage deal for 580,000 workers. The IG BCE union has demanded a pay hike of 6 percent for 12 months.

After making progress during talks that dragged into Wednesday night, an IG BCE spokesman said both sides were close to reaching a deal. In 2016, employers and unions agreed on a two-stage wage increase of 5.3 percent for 24 months.

SOARING TAX REVENUES

Germany’s HDE retail association confirmed its forecast for nominal sales growth of 2 percent this year. It added, however, that consumer morale had become a bit clouded by political uncertainty.

Now in its ninth year, Germany’s economic upswing has led to record-low unemployment, soaring tax revenues and a massive budget surplus which enables the government to hike public spending without taking on new debt.

From January to August, tax revenues of the federal government and the 16 regional states rose 6.4 percent year-on-year, the finance ministry said in its monthly report. That is above the projected rise of 5.3 percent for the whole year.

The debt agency said on Thursday it was cutting its debt issuance plans for the fourth quarter by 2 billion euros ($2.34 billion) as the government has a budget surplus.

“The financing needs of the federal government and its special assets have decreased since the start of 2018,” the agency said in a statement.

Economy Minister Peter Altmaier said on Monday the economy is likely to grow by around 2 percent this year. This would be both below the government’s forecast of 2.3 percent and the calendar-adjusted growth rate of 2.5 percent achieved last year.

“The German economy remains on track for solid growth, even though the pace of expansion is likely to ease somewhat,” the finance ministry said.

It pointed to external risks such as an escalation of the trade dispute between the United States and China, further U.S. tariffs on European imports as well as the unclear outcome of Britain’s negotiations with the European Union about its departure from the bloc. (Reporting by Michael Nienaber; Editing by Adrian Croft and Hugh Lawson)

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