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The IMF warns that rapid wage increases in Central and Eastern Europe could undermine the region’s competitive advantage.
In many countries in the region, incomes have risen by double digits in recent years, but productivity has largely stalled, the fund said.
Alfred Kammer, head of the IMF’s Europe department, told the Financial Times that the trend “could create a competition problem for a region” that has benefited from Western European companies moving production there.
Kammer said that while high wage increases have long been the norm in the region, those in recent years have been “of a different caliber.”
“Our warning is: don’t be complacent and think that this is due to an increase in productivity,” he said ahead of the release of the IMF’s annual report on Europe’s economic outlook. “Is not it.”
Wages rose at double-digit annual rates in the second quarter across much of Central and Eastern Europe – from 16.9 percent in Hungary to 9.9 percent in Slovakia, with the region topping the EU league table for wage increases at 4.5 percent the Union exceeds average. However, inflation in many parts of the region is also well above the EU average.
According to the IMF forecast, wages are expected to rise by an average of 11 percent in 2023 as a whole, slowing to 7 percent next year and 6 percent in 2025.
The report is expected to put the fund on a collision course with Eastern European governments, which have long sought higher wages as one of the major benefits of EU membership.
So far, these gains for the region’s workforce have been accompanied by increases in productivity, with the competitiveness of the region’s workforce helping to attract huge amounts of foreign direct investment, reflected in the opening of new factories by Western European car manufacturers.
But in some countries, including Romania and Poland, millions of workers flocked to the West, tightening the labor market – and creating fertile ground for those still demanding record wage increases.
The IMF said governments in the region should reduce fiscal deficits and take measures to improve “workforce relocation,” increase labor force participation and boost productivity.
Far from slowing the trend, the new coalition government in Poland, led by Donald Tusk, is expected to further raise wages in response to strong pressure from unions who claim high inflation has hit their members hard .
Thousands of civil servants demonstrated in Warsaw in September to demand such pay increases. Tusk and his partners have committed to increasing public sector wages across the board by 20 percent.
The IMF said a “soft landing” was expected for most of Europe’s economy, with inflation falling steadily and growth seeing a slight rebound from 1.3 percent this year to 1.5 percent next year.
But Kammer warned central banks not to cut interest rates too soon as doing so could “re-ignite” inflation and lead to an even more painful series of rate hikes to rein it in.
The European Central Bank left its key interest rates unchanged last month for the first time in 15 months, but some central banks in non-euro zone countries have recently started cutting rates, including those in Poland and Hungary.
Kammer said: “For many central banks, interest rates will need to remain high for an extended period in 2024 and move towards these levels in order to achieve their inflation targets in 2025.”
Inflation in advanced Europe would fall from 5.8 percent this year to 3.3 percent next year, the IMF forecast, adding that inflation in emerging Europe would fall from 11.9 percent this year to 5.8 percent would fall next year.
Additional reporting by Marton Dunai in Budapest and Raphael Minder in Warsaw