The real (CPI-deflated) net wage decline deepened to 2.8% y/y in March from 2.7% y/y in February, according to our calculations based on data released by Monstat. We note that the real net wage grew between January 2016 and April 2017 but swung into decline in May last year after the positive effects from the 2016 public sector wage hike waned. The nominal wage stagnated in annual terms for a third consecutive month. The higher 2.9% y/y CPI inflation in February also contributed to the stronger real net wage decline. The gross wage declined by marginal 0.1% y/y in nominal terms and by much stronger 2.9% y/y in real terms.
Consumer inflation accelerated to 2.9% y/y in March, partly due to the VAT and excise tax hikes that took effect from Jan 1. We expect the fiscal consolidation measures to affect negatively real net wage growth throughout the year. By sectors, the decline in public sector salaries deepened to 3.3% y/y in March from 1.5% y/y in February. Public sector salaries have declined since the start of the year, partly due to the cabinet decision to reduce the wages of senior public sector employees as part of the fiscal tightening measures. Electricity sector wages declined by 0.2% y/y in the month after growing at the same rate in February. On the other hand, the growth in hospitality and financial sector wages was stronger in March compared to the previous month.
Wage moderation was broadly expected as the positive effects from the 2016 public wage hike waned. We also note that the cabinet reduced the salaries of senior public sector employees by 6% from Jul 1 last year as part of its fiscal consolidation strategy, which will continue to negatively affect real net wage changes in the coming months. The cabinet also decided to freeze public sector employment by replacing three retired workers with only one. Thus, prospects for nominal wage growth remain limited and the CPI inflation has accelerated further this year due to the 2pps VAT rate hike to 21% and the EUR0.40 per pack increase in cigarette prices, resulting from the government’s excise tax reform, which took effect from Jan 1.